Light Vehicle Tyres (Rapra Market Report)

Light Vehicle Tyres

Market Report

by

Neil Mullineux

Light Vehicle Tyres

A Rapra Market Report by

Neil Mullineux

September 2004

Rapra Technology Limited Shawbury, Shrewsbury, Shropshire, SY4 4NR, UK Tel: +44 (0)1939 250383 Fax: +44 (0)1939 251118 http://www.rapra.net

The right of Neil Mullineux to be identified as the author of this work has been asserted by him in accordance with Sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

© 2004, Rapra Technology Limited ISBN: 1-85957-484-X All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the prior permission of the publisher, Rapra Technology Limited, Shawbury, Shrewsbury, Shropshire, SY4 4NR, UK. Typeset, printed and bound by Rapra Technology Limited.

Contents 1 Introduction ..................................................................................................................................... 1 1.1 Background..............................................................................................................................................1 1.2 The Report ...............................................................................................................................................1 1.3 Methodology............................................................................................................................................1 1.4 About the Author .....................................................................................................................................2

2 Executive Summary ...................................................................................................................... 3 2.1 Industry Economics .................................................................................................................................3 2.2 Manufacturing .........................................................................................................................................4 2.2.1 Materials...........................................................................................................................................4 2.2.2 Current Manufacturing .....................................................................................................................4 2.2.3 New Manufacturing Methods...........................................................................................................4 2.3 Marketing ................................................................................................................................................4 2.3.1 Brands ..............................................................................................................................................4 2.3.2 Distribution ......................................................................................................................................5 2.3.3 Market Niches ..................................................................................................................................5 2.4 Technical Developments .........................................................................................................................5 2.4.1 Legislative Environment ..................................................................................................................5 2.4.2 Research and Development ..............................................................................................................6 2.5 Recycling.................................................................................................................................................6 2.6 North American Market...........................................................................................................................6 2.7 European Market .....................................................................................................................................7 2.7.1 West and Central Europe..................................................................................................................7 2.7.2 Russia ...............................................................................................................................................9 2.8 Asian Market ...........................................................................................................................................9 2.8.1 Japan.................................................................................................................................................9 2.8.2 South Korea....................................................................................................................................10 2.8.3 India ............................................................................................................................................... 10 2.8.4 China ..............................................................................................................................................11 3 Industry Economics ........................................................................................................................ 13 3.1 Introduction ...........................................................................................................................................13 3.2 World Market ........................................................................................................................................ 13 3.3 Industry Structure ..................................................................................................................................13 3.4 Markets by Product Sector..................................................................................................................... 15 3.5 Sector Markets....................................................................................................................................... 15 3.5.1 Original Equipment (OE) Market...................................................................................................16 3.5.2 Replacement Market ......................................................................................................................17 3.6 Market Characteristics ........................................................................................................................... 18 3.6.1 Market Maturity .............................................................................................................................19 3.6.2 Tyres as a Commodity....................................................................................................................20 3.7 Cost Structure ........................................................................................................................................ 21 3.8 Productivity Increases............................................................................................................................22 3.9 Capacity Changes ..................................................................................................................................23 3.10 Production Relocation .........................................................................................................................24 3.11 Consolidation.......................................................................................................................................26 4 Manufacturing ............................................................................................................................... 31 4.1 Introduction ...........................................................................................................................................31 4.2 Materials ................................................................................................................................................31 4.2.1 Rubber ............................................................................................................................................32 4.2.2 Carbon Black..................................................................................................................................34 4.2.3 Silica............................................................................................................................................... 35 4.2.4 Steel Cord.......................................................................................................................................36 4.2.5 Fibres..............................................................................................................................................37 4.3 Current Manufacturing ......................................................................................................................38 4.4 New Manufacturing Methods ................................................................................................................40 4.4.1 Michelin ......................................................................................................................................... 41 4.4.2 Goodyear ........................................................................................................................................ 42

4.4.3 Bridgestone .................................................................................................................................... 42 4.4.4 Continental..................................................................................................................................... 43 4.4.5 Pirelli.............................................................................................................................................. 44 4.4.6 Other Developments ...................................................................................................................... 44 4.5 The Future for Manufacturing............................................................................................................... 45 5 Marketing ....................................................................................................................................... 47 5.1 Introduction ........................................................................................................................................... 47 5.2 Distribution ........................................................................................................................................... 47 5.2.1 Wholesaling ................................................................................................................................... 47 5.2.2 Retailing......................................................................................................................................... 48 5.2.3 E-Commerce .................................................................................................................................. 49 5.3 Branding................................................................................................................................................ 50 5.5 Market Niches ....................................................................................................................................... 53 5.5.1 High Performance Tyres ................................................................................................................ 53 5.5.2 SUV Tyres ..................................................................................................................................... 55 5.5.3 Winter Tyres .................................................................................................................................. 55 5.5.4 Tuner Market ................................................................................................................................. 57 6 Technical Developments ................................................................................................................. 59 6.1 Introduction ........................................................................................................................................... 59 6.2 Legislative Environment ....................................................................................................................... 60 6.2.1 Environmental Protection .............................................................................................................. 60 6.2.2 Consumer Safety............................................................................................................................ 61 6.2.3 Health and Safety........................................................................................................................... 61 6.2.4 Impact of Legislation ..................................................................................................................... 62 6.3 Research and Development ................................................................................................................... 63 6.3.1 Research and Development............................................................................................................ 63 6.3.2 Materials Development .................................................................................................................. 63 6.3.3 Tyre Property Improvements ......................................................................................................... 64 6.4 Runflat Tyres......................................................................................................................................... 67 6.5 Pressure Sensing.................................................................................................................................... 68 6.6 Future Development.............................................................................................................................. 69 7 Recycling ........................................................................................................................................ 73 7.1 Introduction ........................................................................................................................................... 73 7.2 Hierarchy of Waste................................................................................................................................ 73 7.2.1 Reduction ....................................................................................................................................... 74 7.2.2 Re-use ............................................................................................................................................ 74 7.2.3 Recycling ....................................................................................................................................... 75 7.2.4 Recovery ........................................................................................................................................ 76 7.2.5 Landfill .......................................................................................................................................... 77 7.3 Regional Solutions ................................................................................................................................ 77 7.3.1 North America ............................................................................................................................... 77 7.3.2 Europe............................................................................................................................................ 78 7.3.3 Asia ................................................................................................................................................ 79 7.3.4 Developing Countries .................................................................................................................... 79 8 North American Market ................................................................................................................. 81 8.1 Introduction ........................................................................................................................................... 81 8.2 Market ................................................................................................................................................... 82 8.3 Supply Structure.................................................................................................................................... 84 8.4 Retailing ................................................................................................................................................ 86 9 European Market ........................................................................................................................... 89 9.1 Introduction ........................................................................................................................................... 89 9.2 Market ................................................................................................................................................... 90 9.3 Supply Structure.................................................................................................................................... 92 9.4 Retailing ................................................................................................................................................ 95 9.5 Russia .................................................................................................................................................... 97 9.5.1 Market............................................................................................................................................ 97 9.5.2 Supply Structure ............................................................................................................................ 98 10 Asian Market .............................................................................................................................. 103

10.1 Overview ...........................................................................................................................................103 10.2 Japan..................................................................................................................................................104 10.2.1 Introduction ................................................................................................................................104 10.2.2 Market ........................................................................................................................................104 10.2.3 Supply Structure.........................................................................................................................105 10.2.4 Retailing .....................................................................................................................................106 10.3 South Korea .......................................................................................................................................108 10.4 India...................................................................................................................................................109 10.4.1 Introduction ................................................................................................................................109 10.4.2 Market ........................................................................................................................................110 10.4.3 Supply Structure.........................................................................................................................112 10.4.4 Retailing .....................................................................................................................................114 10.5 China .................................................................................................................................................114 10.5.1 Introduction ................................................................................................................................114 10.5.2 Market ........................................................................................................................................115 10.5.3 Supply Structure.........................................................................................................................116 10.5.4 Retailing .....................................................................................................................................119 Abbreviations and Acronyms ....................................................................................................................121

Light Vehicle Tyres

1 Introduction 1.1 Background The tyre industry is the largest part of the rubber manufacturing industry; indeed it is so large that it is usually classed as an industry in its own right. It dwarfs any other part of the rubber industry and absorbs well over two-thirds of all natural rubber production and almost as large a proportion of synthetic rubber manufacture. Consequently much of the innovation in the wider rubber industry, both in terms of materials and in terms of manufacturing, emanates from the tyre industry. Rapra Technology is Europe’s leading independent plastics and rubber specialist, with over 80 years experience of providing technology, information and consultancy on all aspects of plastics, rubbers and polymer-based composites. An important aspect of this activity is publishing technical and market information on these materials. A comprehensive analysis of the economics of the tyre industry was seen as a key component of the publishing catalogue, both as an important title in its own right and as an essential background to many of the other reports. Light vehicle tyres and heavy truck and machinery tyres are both part of the tyre market, but because they differ dramatically in their composition, manufacture and marketing it was decided to separate the two and restrict this volume to light vehicle tyres, particularly passenger car tyres. 1.2 The Report This report is designed as a systematic analysis of the passenger car tyre industry. It starts with a broad view of the industry, examining first the major markets for tyres and the manufacturers of tyres. It then goes on to identify the chief characteristics of the industry and the major economic and commercial pressures impinging upon it. This introduces and brings together themes that will reappear throughout the rest of the report. It then examines critical aspects of the world industry – manufacturing, marketing, technical developments and recycling; describing the changes that are taking place and explaining why they are happening. The three major markets for tyres – North America, Europe and Asia, which together account for almost 90% of world demand, are analysed in the next three chapters. There are common themes to all three markets, but they have major differences and these are brought out and contrasted. Profiles of the largest manufacturers – Bridgestone, Goodyear and Michelin – are juxtaposed in a single chapter to facilitate comparison between these three dominant companies. Between them they command almost 60% of the world market, but six mid-size companies also play key roles in certain regional markets, and these are also profiled. Finally, the report looks at the future for the industry, drawing together the various themes that have been identified and projecting a future scenario for the industry. 1.3 Methodology The report uses as a foundation extensive desk research based primarily on technical literature and industry journals published in North America, Europe and Asia. This includes information from the Rapra Polymer Library (www.polymerlibrary.com). In particular it makes use of two sources of quantitative data – The Michelin Fact Book 2003 and the World Tire Report 2003 published by Crain Communications as a supplement to their rubber industry publications. All quantitative data is attributed to its source.

1

Light Vehicle Tyres

This factual basis for the report has been augmented and filled out with a programme of interviews with senior management in all the major companies and with other companies and organisations that deal with the industry – suppliers, service companies, trade associations, etc. Although the report is largely based on a factual data, opinions are expressed throughout the report, particularly when projecting future trends. These opinions are solely the responsibility of the author. 1.4 About the Author Neil Mullineux is a partner in Bowfell Associates, an independent consultancy specialising in market research and strategy for the automotive industry. He has worked in Europe, North America and East Asia for both vehicle and components manufacturers and has undertaken several projects for intergovernmental agencies. He is a Visiting Research Fellow in the Centre for Automotive Industry Management at Nottingham Business School. He has written a series of reports on aspects of the international automotive industry for Financial Times Business and the Economist Intelligence Unit.

2

Light Vehicle Tyres

2 Executive Summary The tyre industry is the largest part of the rubber manufacturing industry; indeed it is so large that it is usually classed as an industry in its own right. Consequently much of the innovation in the wider rubber industry, both in terms of materials and in terms of manufacturing, emanates from the tyre industry. This report is designed as a systematic analysis of the passenger car tyre industry. 2.1 Industry Economics Three large companies – Bridgestone, Goodyear and Michelin – now dominate the world tyre market with a share of about 56%. There then follow four mid-sized companies, which have about 18% of the world market – Continental, Sumitomo, Pirelli and Yokohama – with a combined share of 17.6%. In total eleven companies account for 81.6% of the world market. Even though the largest companies have a turnover well in excess of $10bn, they remain largely specialist tyre manufacturers. Many of the smaller companies also concentrate almost exclusively on tyres. However, the medium-sized companies are diversifying away from tyre manufacturing. Passenger car tyres are the most well-known product of the tyre industry but they are by no means the only product. World production of tyres ranges from lightweight and relatively unsophisticated bicycle tyres to very large and very expensive tyres for giant machinery such as earthmovers or jumbo jets. Unusually, if not uniquely, in the automotive components industry, the tyre manufacturers only sell a minority of their output to OEMs. The key factor that distinguishes the tyre market from any other automotive component is the size of the replacement market or aftermarket – three-quarters of road tyres are sold as replacement tyres and only one-quarter as original equipment. The big three tyre manufacturers dominate the OE market, but other large regional players also have a share, particularly in Europe. Worldwide, the replacement tyre market for light vehicles represents about 714m tyres. The replacement tyre market is certainly more profitable for the tyre manufacturers but it has distinct problems. The general problems of slow growth and market maturity are exacerbated by cyclical growth in supply to OEMs. Despite the poor profitability of sales to OE customers and even though the replacement market represents over 70% of the passenger car tyre industry’s sales, tyre makers’ profitability is also cyclical. The replacement market is a relatively profitable sector of the overall tyre market, but it cannot compensate for the vagaries of the OE market. A traditional indication of market maturity is continual pricing pressure in the market. Although the world tyre market appears to be an oligopoly, there are enough small competitors to keep continual pressure on prices. In broad terms a tyre which cost $69.90 in 1979 sold for $41.02 in 2003. The major companies within the tyre industry are all constrained by the laws of economics and subject to similar commercial pressures. In very broad terms the cost of tyre manufacture breaks into three parts: raw materials; labour; and fixed costs. The tyre industry has high fixed costs, making it extremely difficult to improve returns unless costs are cut or market share gained. Raw materials typically represent 25% of the selling price of a car tyre. Labour costs represent about 30% of sales and this has led to a move for manufacture in lower labour cost countries. This has been helped by relatively low transportation costs for the inter-regional movement of tyres – about $1-2 for a passenger tyre. In the last decade all manufacturers have tried to increase productivity in existing operations in order to become low-cost producers. The continuing drive for improved productivity has resulted in excess capacity in many areas and product sectors.

3

Light Vehicle Tyres

The overall outlook for the tyre industry is dependent upon supply much more than demand. There is a close relationship between aggregate supply and profitability for individual tyre companies. As a result there have been gradual moves towards consolidation. Before 1985 a dozen large companies dominated the world tyre market, but after a rapid series of mergers and acquisitions, seven companies emerged with three-quarters of the market. 2.2 Manufacturing

2.2.1 Materials Production of synthetic rubber achieved parity with natural rubber in 1967 and since then more synthetic rubber has been used in tyre production than natural rubber. Carbon black has been used as the filler of choice for tyres since the 1920s, although it is now receiving competition from silica. Silica-filled rubber reduces the rolling resistance of tyres markedly but initially it had a detrimental effect on other tyre properties such as traction and durability. Steel cord is used in all radial tyres, both for passenger cars and for trucks, as a reinforcement, and to form the bead which secures the tyre to the wheel. In addition a wide variety of fibres are used in tyres as reinforcement.

2.2.2 Current Manufacturing Tyre manufacturing is part of the chemical industry but unlike most processes in the chemical industry, tyre manufacture is a discontinuous process. A tyre is a composite product of materials that have widely differing properties. The three main materials used in a tyre – polymers, fabric and steel reinforcement – follow separate routes in the preparatory stages of tyre manufacture. The polymers, various mixes of natural and synthetic rubbers, are mixed with fillers – carbon black or silica – and other chemicals to make the rubber component of the tyre. The various subassemblies are then brought together for the building process. The individual components are pressed into shape sequentially by automatic rollers, giving a green tyre. This is placed in a curing press and the curing process changes the rubber permanently by vulcanising it, converting the “green tyre” to a finished product.

2.2.3 New Manufacturing Methods Large-scale plants making enormous quantities of a very few types of tyre are very efficient for the most popular tyres, but the market has been fragmenting, with both tyre sizes and types proliferating. All manufacturers have been looking at ways to reduce the inefficiencies in their production process and at the same time looking to serve the market demand more effectively. The key to any improvement in manufacturing is to make it more of a continuous process and to reduce the number of break points which destroy this continuity, eliminating as many of the steps involving semi-finished components as possible. The new methods introduced by the major companies are examined in detail. The new developments have come mainly from the dominant firms in the industry. It would appear that production advantages are beginning to swing back to the large established companies and away from the aggressive newcomers. 2.3 Marketing

2.3.1 Brands About 30% of passenger car tyres are sold to original equipment manufacturers, and these buyers are extremely sophisticated. The tyre brand means little to them (though it does have some influence in their choice of tyres, particularly for prestige or high performance vehicles). The other

4

Light Vehicle Tyres

70% of passenger car tyres are an aftermarket product and it is here that the tyre companies are attempting to get rid of their commodity reputation by developing brands. In order to clarify their brand structure most manufacturers have concentrated their efforts on three main brands, but because they have only recently become true multinationals they have had considerable difficulty even achieving this simple brand structure. They have chosen a “good, better, best” formula.

2.3.2 Distribution In most of the developed markets distribution is a two-tier operation with both wholesalers and retailers servicing the market but the balance and function varies between regions. Retailing is carried out by a wide range of businesses ranging from petrol service stations to large chains of specialist tyre fitters. In most developed economies independent tyre fitters operating a two or three bay centre comprise the majority of outlets and the non-specialist outlets are in decline. The Internet is gaining in importance as more than 60 percent of tyre buyers access the Internet, but only 16 percent of them use it when they need to buy tyres.

2.3.3 Market Niches Every manufacturer seeks out market niches – areas of the market where it can establish a special position. Three segments of the passenger car tyre market are particularly buoyant at present, showing rates of growth which far outstrip the market average. Consequently most manufacturers are concentrating a lot of their activity on these three sectors – ultra-high performance tyres, SUV tyres and winter tyres. High performance and ultra-high performance tyres used to be limited to a very small segment of the market, but as cars have improved in performance and specification these tyres are now commanding an ever larger share of the market. In Europe especially, but also in North America, there has been a surge in demand for high performance tyres – V-, W- and Zrated tyres. Of the 63.6 million replacement tyres shipped to the performance sector, the ultra-highperformance tier accounted for about 34.7 percent. In Europe high performance tyres will increase from a market share of 18% in 2000 to a forecast share of 31% in 2005. The market for SUV tyres has grown as rapidly as the market for sports utility vehicles and, until recently, has shown little sign of slowing down. The market for winter tyres has built up gradually but it is an erratic market and very seasonal. 80% of sales are made in the second half of the year and demand can be very fickle, depending on the date of the first snowfall. The market is likely to grow at a faster rate than the general tyre market but the growth is unlikely to be consistent. However, over time growth is significant. In 1995 winter tyres accounted for 0.5% of the Dutch market but by 2002 this had risen to 7%. 2.4 Technical Developments Passenger car tyres provide by far the largest market for tyre manufacturers but at the same time they demand a high level of research and development. The OE market in particular demands a lot from the tyre industry as the vehicle designers set very specific requirements for the tyre manufacturers to reach. Developments tend to be incremental but, in total, tyre technology has made enormous progress in recent years. A typical tyre has become lighter and longer lasting with less rolling resistance.

2.4.1 Legislative Environment The tyre industry has always worked within a framework of legislation but, until recently, the legislation has been essentially national. There is an increased focus on requiring enhanced environmental protection in all areas relating to tyres – tyre production, tyre usage and tyre

5

Light Vehicle Tyres

disposal. The most recent environmental measure of specific application to tyres is the EU Directive on tyre noise, which sets limits on the noise that tyres may make when in contact with the road. An even more immediate challenge has been established by the End-of-Life Vehicles (ELV) Directive. Until recently tyre safety has been of little concern to legislators. However, this situation has now changed as the TREAD Act in the US is a much more intrusive measure. The normal health and safety regulations affect the tyre industry but this is a burden shared equally by all companies. However, there is a growing disparity between the developed regions where legislation demands roughly equal standards between countries in Europe and North America and the countries of the developing world where standards are much lower or non-existent.

2.4.2 Research and Development The tyre industry spends over $2.5bn on research and development each year. Both tyre quality and roads have improved dramatically over the past century but there is still pressure to improve the life of tyres. This is being carried out both by improvements in materials and by design modifications. Reducing tyre weight is particularly important as it reduces the unsprung weight of the vehicle. Tyre/road noise is one of the major environmental problems of modern society and is not yet under control. The rolling resistance of tyres was not given much attention until recently; far more attention was paid to grip and braking capability. However, the increased emphasis on economy and environmentally friendly equipment has now given it much more importance. Developments in other tyre characteristics such as wet grip, high performance and winter tyres are also examined. The innovative PAX tyre developed by Michelin is analysed and its prospects discussed. New developments, particularly run-flat tyres and the alternative methods of pressure sensing, are discussed and new technologies which will affect tyre design in the future are examined, culminating in the objective of the intelligent tyre. Almost every tyre company is keen to emphasise its ability to develop integrated systems which can optimise braking and steering performance in cars and the different approaches are discussed. 2.5 Recycling The disposal of scrap tyres is a problem that has been growing for decades as volumes increase and because a vulcanised rubber tyre is a difficult recycling challenge. In environmental terms there are five broad alternatives for disposal demonstrating the relative desirability of each approach. In descending order of preferment the hierarchy alternatives are: • • • • •

Reduction – reducing the number of tyres that need to be scrapped. Re-use – either retreading to make a new tyre or using scrap tyres for other purposes. Recycling – treating the materials in a tyre so that they can be used in other products. Recovery – essentially burning in order to recover energy. Disposal – landfill

The progress in each of these areas is examined. The chapter then goes on to examine the approach being taken in the main world regions, North America, Europe and Japan and Korea. Some disposal schemes are taking place in developing countries but these are isolated schemes rather than comprehensive disposal plans. 2.6 North American Market The three countries, Canada, Mexico and the USA, account for almost one-third of the world demand for OE tyres and well over one-third of the demand for replacement tyres. Of the three main regions for the world tyre industry North America is the largest, but the other two are

6

Light Vehicle Tyres

catching up quickly. Because of the relative poverty in Mexico that country only accounts for about 5% of the tyre market, compared with 10% in Canada and 85% in the USA. Not only is North America the largest world market, it was also the earliest one to develop. However, although this led to early dominance in world markets the US companies were unwilling to learn from others. Consequently they were slow to innovate and this left them vulnerable to takeover. However, it is essential for any large tyre manufacturer to have a presence in North America. Once a company has a credible presence in this market, it is no longer a French supplier or a Japanese supplier, but a global one. The two trends in the North American tyre market are linked with the move towards more powerful vehicles. Tyres for the mass market still predominate, but there is a steady growth in tyres for SUVs and also in high performance and ultra-high performance tyres. A total of 65 plants supply the North American market, the majority being in the USA. The big three companies – Bridgestone, Goodyear and Michelin – dominate North American production with 40 of the 65 plants, 62% of the total in terms of numbers, but about 70% in terms of capacity. There is a move offshore for the more standard tyres, concentrating North American production on higher quality tyres with more value added. Total capacity is roughly in line with market demand but the North American market, like other regional markets, is not self-sufficient. About a quarter of the demand is satisfied by imports, partly from companies in Korea, India and China but mainly by the big international companies bringing in tyres from their plants elsewhere in the world. Goodyear is the leader in the US/Canadian OE light vehicle tyre market, but Firestone takes that position in Mexico. Goodyear is also the market leader in the region for replacement tyres but Michelin is also strong in this area. There are three broad groups of brands in the North American market – flag brands, associate brands and private brands – and the major manufacturers are associated with all three. For a long time private brands were gaining market share, but since 1991 the majors have fought back with their flag brands for brand conscious motorists and associate brands for the price conscious. The distribution of tyres has been undergoing a fundamental change, with the emphasis moving away from independent tyre specialists and towards chains and mass merchandisers. For marketing purposes the market can be divided into four distinct segments: • • • •

Brand conscious – about 26%, increasingly slightly. Value customer – about 27% and rising. Customers who would prefer an associate brand. Store reliant – 24% and stable. Would rely on store recommendation. Price conscious – about 22%, declining. Looking for the cheapest suitable product.

This change in consumer preferences has led to a dramatic shift in the channels of distribution. There has been a rise in the importance of tyre discount chains and of warehouse clubs, and an upheaval in the position of mass merchandisers. The small independents appear to be a dying breed, even though single outlets still account for 25% of tyre sales. Manufacturer outlets comprise about 8% of the total market, and this proportion has declined steadily for some years. 2.7 European Market

2.7.1 West and Central Europe Europe is second only to North America in importance for the tyre industry, but it is a very different market. The countries bordering western Europe are now members of the EU and are rapidly being integrated into the economy of the west. The US companies, Goodyear and Firestone, were the first to consider western Europe as a single entity rather than individual countries. The companies acquired in eastern Europe have now been integrated into the wider European

7

Light Vehicle Tyres

production network of each company and form part of their overall strategy for the region, particularly with the accession of ten new countries into the EU in May 2004. The strategy for all the multinationals has been to establish a manufacturing presence in central Europe for three purposes: • • •

To provide a low cost supply point for western markets; To establish a presence in developing countries that are likely to grow rapidly; To act as a bridgehead for penetration into eastern Europe and Russia.

Europe is, in total, a very large market and also probably the most sophisticated and demanding market in the world though it is mature and only growing slowly. The overall market is forecast to expand at an average annual rate of 3.3% until 2008, somewhat faster than North America but much slower than in the high growth areas of Asia. The key to the market is that Europe is the home to more car manufacturers than anywhere else. The OEMs provide a market in their own right, but they also set new demands on the tyre industry with every new model that is launched and this in turn leads to more sophisticated and more knowledgeable tyre buyers in the replacement market. As in North America, about half of the market buy mass market tyres but a very high 41% of drivers use high performance tyres compared with 17% in North America. Tyre sizes of 16'' and 17'' are now much more common and low profile tyres are helped by this trend. Although the winters are no worse than in many parts of America, winter tyres account for almost a quarter of the market. The market is mainly concentrated in central and northern Europe – Scandinavia, Germany, Austria and Switzerland, but it is beginning to make progress in eastern Europe as well. The rest of Europe use summer tyres all year round; there is only a very small market for all-season tyres. Instead of a national management structure in each country, the tyre manufacturers now use all factories in the region as a production resource. In recent years overcapacity has been very apparent but the major players have carried out a programme of plant closures. However, Europe has over 90 plants serving a market similar in size to North America, where there are only 60 plants. The replacement tyre market is mature and relatively stable because of the long-term contracts in place with equity chains and independent dealers. Now that Goodyear has taken management control of Sumitomo’s Dunlop operations in the region, five multinationals dominate the market in Europe – Michelin, Goodyear, Continental, Bridgestone and Pirelli. Between them they command 83% of the market. Michelin is the market leader in Europe, but in the course of the 1990s it lost a little of its market share because of its lack of a low price brand. Continental has traditionally been the second largest tyre supplier to the European market, but Goodyear fought tenaciously for that position and eventually achieved it when it took control of Sumitomo’s Dunlop subsidiary. The independent importers bring in tyres from manufacturers elsewhere in the world, particularly from the Far East. These companies made dramatic market share gains when they first entered the market, as the tyres were sold at significant price discounts to existing brands. This progress swiftly slowed as the multinationals reacted by bringing in their own branded tyres from low cost countries. In most European countries the manufacturers sell to wholesalers who, in turn, distribute to retail outlets. The majority of retail outlets in Europe are specialist tyre fitting centres or tyre and exhaust centres; only a minority of replacement tyres are sold by independent garages, and an even smaller proportion by franchised garages. Across the EU, 50% of replacement passenger car/light truck tyres are sold through tyre specialists (independents, tyre manufacturers’ controlled chains etc.), 10% through car dealers, 20-30% through fast fit centres and the remainder through a variety of outlets. Independent tyre dealers dominate the aftermarket in Germany, Italy, Scandinavia and Spain whereas in the UK, Belgium and the Netherlands chains of tyre centres predominate. The real growth in the European tyre market is found with independent groups, usually led by an entrepreneur.

8

Light Vehicle Tyres

2.7.2 Russia The break-up of the Soviet Union appeared to promise enormous opportunities for Western tyre manufacturers. Although the multinational tyre suppliers were very quick to invest in the countries of eastern Europe, they were much more reluctant to do so in Russia itself. That position is now changing with investments by Continental, Michelin and Nokian but recent events illustrating the capricious nature of commercial law could reverse the trend. The Russian tyre market, including imports, is estimated to be in the region of 35 million tyres at present. Prices of Russian-made tyres have fallen dramatically in the last two or three years as the main producers fight for sales. Western tyres are much more expensive as they are better made and much more durable, but there is also a certain cachet in using them for those Russians that can afford them. However, the prestige value of western tyres cannot command the premium across all brands that it has done in the recent past. There are 12 tyre plants in Russia but many of them are small and all of them have relatively old equipment. This is beginning to change as new owners are investing significant capital. Michelin’s new plant at Davydovo is expected to have a capacity of 2 million tyres when it reaches full production in 2005. Imported tyres are significant but their importance is declining as Russian companies improve their quality levels. In general terms the Japanese and South Korean companies are stronger east of the Urals, whilst the European brands predominate in Russia west of the Urals. The four biggest selling brands are Nokian, Continental, Matador and Bridgestone. 2.8 Asian Market Asia is a geographic term for a wide variety of different cultures, climates and countries. In economic terms it ranges from the rich but mature market of Japan to some of the poorest countries on earth. However, it is growing very rapidly as a region and the tyre market is growing with it. All the major companies must be active in the area or they will miss out on vigorous growth rates in most of the countries and enormous potential markets. The market for cross-ply tyres is declining rapidly as radials are becoming available and new investment is almost exclusively for radial tyres. As in North America and Europe there is a trend towards larger tyre sizes as wheels get bigger and the demand for high performance tyres is actually higher than in North America.

2.8.1 Japan The Japanese tyre market is more like the European or North American market than that of any other Asian country. The maturing market in Japan has provided a growing demand for replacement tyres, and the tyre industry has become less dependent on OE supply. In 1975 OE demand accounted for 60% of the Japanese market for tyres but by 2003 this had fallen to 33%. The total domestic market of about 150 million light vehicle tyres has hardly grown at all in the last decade because of this decline in OE demand. Four Japanese manufacturers are in the top ten global companies – Bridgestone, Sumitomo, Yokohama and Toyo – and these firms dominate the market in Japan. Bridgestone alone has a market share of 46% and Yokohama and Sumitomo have shares of 23% and 19% respectively. Until 1986 the Japanese market was essentially closed to foreign-made tyres, but in that year the vehicle manufacturers instituted voluntary programmes to import US-made parts. In relation to the domestic market for passenger car tyres, imports have remained fairly steady at between 11% and 15% over the decade. European sourced tyres have made little headway into the Japanese market, and South Korea is also finding the market difficult, but tyres made in Taiwan are gaining market share. Chinese imports are also significant. Distribution channels for replacement tyres are particularly wide-ranging and complex, with vehicle distributors which have taken a leading role until recently, having now been overtaken by

9

Light Vehicle Tyres

speciality stores. The chief distribution channels are roughly divided into two types: direct sales and indirect sales. In Japan, the attitude toward buying tyres is different than in the west. To the Japanese, new tyres represent the renewal of a car's life and it's a happy purchase for people who like to drive. A marked feature of tyre distribution in Japan over the last decade has been the sharp growth in discount and auto speciality chains.

2.8.2 South Korea As in Japan, the tyre industry has grown alongside the burgeoning automotive industry, but it is not reliant upon it. The two indigenous tyre producers, Kumho and Hankook, have established their brands with some success in Africa and South America as well as the more mature markets. The replacement market is only a little larger than the OE market. In 2003 passenger car tyre replacements amounted to just under 10m tyres with light trucks accounting for another 2.5m. The market for OE tyres was 6m passenger car tyres and 2.5m light truck tyres. Although the nature of the market is changing the structure is not, as distribution outlets are tightly controlled by the two largest companies – Kumho and Hankook. Each have their own chains of franchised operations and these are exclusive to the firm, selling only that company’s brands. Hankook has a slightly larger share of the domestic market, whilst Kumho exports more. The importance of Korea for the world tyre industry is that it is the home of two aggressive and ambitious manufacturers. The domestic market is significant, both for OE supply and, increasingly, for replacement tyres but it is still smaller than several European countries. However Korea is no longer a low-cost location for tyre factories.

2.8.3 India It is only in the last decade that the Indian economy has begun to open up to the world industry. Many of the multinational tyre manufacturers have shown a new or renewed interest in the country. Both the Indian market and the world market are changing rapidly and some companies, particularly the smaller ones, are finding it difficult to come to terms with the changing circumstances. In most countries passenger car tyres are the most significant product, but in India production of these is dwarfed (in value terms) by output of truck and bus tyres. In total the Indian market for light vehicle tyres is smaller than South Korea, but it is still an attractive market for international producers because it is a much more varied market than just tyres for light vehicles and it is growing rapidly. Traditionally, cross-ply tyres have dominated the Indian market but radials are now growing rapidly, particularly for light vehicles. The tyre industry in India comprises 40 tyre companies, operating 53 factories. However, 12 companies account for over 85% of total unit production. Capacity utilisation is estimated at 72% across the industry. At present the largest firm in India is MRF, followed by Apollo and JK Tyres which are very similar in size. These are followed by Ceat and, some way behind, Birla and Modi. Goodyear has had a presence in the country for many years and Bridgestone and Michelin now have a significant presence, the latter in a joint venture with Apollo. India is beginning to see tyres imported from China as a threat. They are considerably cheaper than home-produced tyres because the Chinese have access to lower cost rubber and cheaper labour. One of the biggest competitive advantages, however, is the lower cost of finance in China. The Indian market is huge in geographical terms but hindered by poor infrastructure. Until recently it has been very difficult to achieve a truly national presence. Now improvements in the road network and a realisation by the companies of the value of a national network are changing this situation rapidly. Most distribution is carried out by wholesalers though MRF, JK, Ceat and Goodyear have built up chains of exclusive dealers.

10

Light Vehicle Tyres

2.8.4 China China’s progress since it first opened to foreign investment and reform in 1978 has been very impressive. Over the past 25 years, its real gross domestic product has expanded at an average of 9% per year. Most of the big multinational tyre suppliers are now established in joint ventures in China, but progress has been slow and difficult and it is likely that continued development will take a considerable time. Passenger car tyre sales are growing rapidly, but they still only account for a minority of production. Production is spread throughout the whole country, but passenger tyre production is concentrated in the coastal provinces, particularly in the regions around Beijing and Shanghai. The large companies account for the bulk of production. This proportion is becoming greater, as the small companies find it difficult to compete and are gradually exiting the industry. Currently about 90% of the passenger car tyres produced for the Chinese market are radials, and that figure should reach 100% by 2005. However, a significant number of cross-ply tyres are still made for export. The market for tyres is growing rapidly at about 6-7% per year, but there are too many manufacturers and they are all trying to survive. Chinese tyre factories fall into three broad groups. The majority are still old, traditional local factories. The second group is comprised of about a dozen factories that have recognised their problems and purchased western machinery in order to improve the processes, but these plants are burdened with so much debt that they are effectively bankrupt, and many have ceased production. The third group comprises both Chinese and western companies. Large domestic Chinese companies which have been identified by the Chemical Ministry as key companies and western companies which have established plants in China. It is this third group which will survive and comprise the tyre industry of the future. The companies, particularly the western companies, are investing heavily both in production equipment and, more importantly, in distribution networks. Most companies are concentrating on the coastal provinces, partly because that is where the factories are based but, more importantly, because this is the area with the most income. Most have networks of several hundred distributors and are aiming for several thousand retail outlets. Bridgestone and a few other companies are establishing a few company owned stores to act as beacons and exemplars. However, there are still many problems, not just for new businesses but also for firms that are well-established and which think they know the local market.

11

Light Vehicle Tyres

12

Light Vehicle Tyres

3 Industry Economics 3.1 Introduction ‘Round, black and boring’ is a phrase often used about tyres although the industry is quick to point out that a tyre is a sophisticated product of advanced material engineering. Tyres are the most complex, important, least appreciated, and least well-maintained component on a car. There are as many components in a tyre as there are in an engine. But, unlike an engine, you can’t take them apart and rebuild them. Like everything else connected with the motor car, tyres evolve from carefully evaluated compromises. They must cope with numerous demands, many conflicting. They must grip, brake and corner satisfactorily on all surfaces, in all weather conditions. They must have a low rolling resistance to assist fuel economy. They must not squeal or whine too much. They must not flex excessively under load, yet they must not detract from ride comfort. They must resist punctures and must not wear out too quickly but they must not be too expensive. And all this has to be carried out when the area of contact with the road at any one time is no bigger than a man’s palm. However, the term ‘boring’ can in no way be applied to the tyre industry. It is a large industry with a turnover of $69 billion in 2002. It is an economically important industry, employing more than 600,000 people directly and several million indirectly. It is a ubiquitous industry as virtually every human being on the planet comes into frequent contact with tyres and often regard themselves as knowledgeable on the subject because of this contact. Above all it is a politically sensitive industry because of its size, its environmental impact and its multinational ownership. This chapter examines the structure and chief characteristics of the tyre industry and the major economic and commercial pressures influencing it. 3.2 World Market The world tyre market grew from about US$30 billion in 1983 to US$70 billion in 1996, but since then it has stagnated in dollar terms at around US$70 billion (US$70.55 billion in 2001). However, these are current local prices translated into dollars at the prevailing exchange rate and in recent years the high value of the dollar has concealed the underlying volume growth. The recent fall in the value of the dollar should make the total market value begin to grow once more. In volume terms growth varies from year to year, but over the last decade it has averaged between 2% and 3%. 3.3 Industry Structure The last 20 years have seen a dramatic concentration in the number of major players in the market – five of the ten largest companies in 1981 have now been taken over by competitors. This concentration is continuing, though in a less dramatic manner, with smaller companies forming alliances or being bought out by larger competitors. The latest major development involves Michelin acquiring a 10% stake in Hankook and the two companies pursuing links in the manufacturing, distribution and R&D areas. As a result, the three largest companies – Bridgestone, Goodyear and Michelin – now dominate the world tyre market with a share of about 56%. These are the only truly multinational companies with manufacturing facilities and sales networks in most of the world regions. There then follow four mid-sized companies, which have about 18% of the world market – Continental, Sumitomo, Pirelli and Yokohama. These companies usually have a strong presence in perhaps two or three world regions, but not all. At present Sumitomo Rubber is in this group, but since its alliance with Goodyear it has transferred assets in both North America and Europe to its US partner, and consequently it could be argued that it is now a regional rather than a multinational

13

Light Vehicle Tyres

company. The remaining 26% of the market is split between 100 mainly local companies, although a few of the larger ones have significant export markets (Table 3.1). This applies particularly to Toyo of Japan and the two South Korean manufacturers, Kumho and Hankook. Company Michelin Bridgestone Goodyear Continental Pirelli Sumitomo Yokohama Approx 100 companies Source: Tire Business

Table 3.1 Global tyre market share 2003 % Share 19.2 19.1 17.4 6.8 3.8 3.7 3.3 26.7

To put these market shares in perspective, the total world market for tyres is estimated to be over $70 billion. The big three producers (Bridgestone, Goodyear and Michelin) all have a sales turnover in the range of $12-14 billion and the next four range between $2.4 billion and $4.8 billion. Cooper, Kumho, Toyo and Hankook all sell over $1 billion each year. Between them, these eleven companies account for 81.6% of the world market (Table 3.2). Company Michelin Bridgestone Goodyear Continental Pirelli Sumitomo Yokohama Cooper Kumho Toyo Hankook Cheng Shin Source: Tire Business

Table 3.2 12 Largest tyre manufacturers 2002/2003 Tyre Sales US$ billion Tyres as % of total business 13.6 95 13.5 75 12.3 89 4.8 45 2.7 41 2.6 74 2.4 72 1.7 52 1.4 67 1.3 62 1.3 87 0.6 100

Even though the largest companies have a turnover well in excess of $10 billion, they remain largely specialist tyre manufacturers. Almost all of Michelin's sales are attributable to tyre manufacture, almost 90% of Goodyear's, and just under 75% of Bridgestone’s. Many of the smaller companies also concentrate almost exclusively on tyres. However, the medium-sized companies are diversifying away from tyre manufacturing. Pirelli has always had extensive interests in cable manufacturing, Continental has now acquired a large business in automotive chassis systems and Cooper has also diversified by buying a manufacturer of automotive components, although it now seems to have decided that this was a mistake as it is trying to sell the non-tyre business. The three major multinationals dominate world production patterns with 152 plants in all the main world regions (Table 3.3). The smaller international companies have a further 55 plants worldwide and these plants are, in general, much larger and more efficient than the around 200 plants controlled by purely local companies. Indeed many of these latter plants are effectively closed either through lack of investment or because foreign exchange difficulties prevent them from importing raw materials.

14

Light Vehicle Tyres

Table 3.3 World tyre production facilities 2003 Region

Bridgestone

Goodyear

Michelin

North America 11 13 South America 5 7 Europe 6 14 Japan 9 1 Other Asia 8 8 Australasia 2 2 Mid east 1 2 Africa 2 2 Total 44 49 Source: Company accounts Note: This table only includes plants belonging to international plants owned by firms with plants in only one country.

15 5 31 1 5 0 1 2 60

Other International 14 8 22 12 25 0 0 10 91

companies. It does not include

3.4 Markets by Product Sector Passenger car tyres are the most well-known product of the tyre industry but they are by no means the only product. World production of tyres ranges from lightweight and relatively unsophisticated bicycle tyres to very large and very expensive tyres for giant machinery such as earthmovers or jumbo jets. Table 3.4 shows the relative size of these markets in terms of value. Table 3.4 World tyre market by product sector 2003 Sector Value US$ billion % of total Passenger car and light truck 35.9 50.9 Heavy truck 23.4 33.2 Two-wheeler 4.2 6.0 Earthmover 4.1 5.8 Agricultural 2.4 3.4 Aircraft 0.5 0.7 Total 70.5 100 Source: Bowfell.net The bulk of the market in volume terms comprises tyres for passenger cars and light trucks, but heavy truck tyres account for more than a quarter of the market by value, and there are also significant sectors for earthmoving vehicles, agricultural vehicles and two wheelers (motorcycles, scooters and bicycles). Some of the smaller sectors such as bicycle tyres are low-tech commodity products, but others, particularly earth moving and aircraft tyres, have higher margins than the much larger markets for car and truck tyres. 3.5 Sector Markets Unusually, if not uniquely, in the automotive components industry, the tyre manufacturers only sell a minority of their output to original equipment manufacturers (OEMs). The bulk of sales are to distributors selling to millions of individuals in the replacement market. The key factor that distinguishes the tyre market from any other automotive component is the size of the replacement market or aftermarket – three quarters of road tyres are sold as replacement tyres and only one quarter as original equipment (Table 3.5).

15

Light Vehicle Tyres

OEM Replacement Total Source: Michelin

Table 3.5 World tyre market by end-use 2003 Passenger car tyres (m) 278 716 994

% 28 72 100

3.5.1 Original Equipment (OE) Market Although it only represents a minority of sales, the OE market is vitally important to the major manufacturers even though the tyres are sold at very low prices. The vehicle manufacturers stimulate and encourage tyre development and the specification of a tyre as original equipment gives that manufacturer an advantage when the customer comes to replacing it. However, even ignoring the additional R&D costs incurred, these tyres are sold to OEMs at prices that are barely profitable. Although the OE market for light vehicle tyres is 30% of the total in terms of volume, it only represents 19% in terms of revenue. The continual drive by the OEMs to reduce their component costs has exacerbated this problem in the last decade. Several tyre manufacturers have now put profitability before either volume or prestige and have declined to bid for contracts. Most recently Michelin has either not bid for certain new contracts or has declined to continue with existing contracts because of the very low margins on these contracts. However, the pendulum will swing back as both the OEMs and the major tyre manufacturers need each other. The OEMs know that only the largest tyre suppliers can afford the R&D effort that is necessary when designing tyres for new vehicles. Similarly, the tyre manufacturers like the credibility that association with well-known vehicle brands gives them. Although only about a quarter of road tyres are specified and purchased by the vehicle manufacturers, this segment of the market is very important as it drives technical development and it has a major influence over the aftermarket. The regional demand is dictated by the location of the main production centres for vehicles, namely North America, Europe and Japan (Table 3.6). Table 3.6 Regional demand for OE tyres 2003

North America Europe Asia South America Middle East/Africa Total Source: Michelin

Volume (m units)

% of total

80 89 96 8 7 280

28.5 31.8 34.3 2.9 2.5 100

Forecast annual growth rate 2003-2008 +0.34 +1.5 +6.2 +1.2 +6.2 +2.9

The big three tyre manufacturers dominate this market, but other large regional players also have a share, particularly in Europe. The companies that do not play an important role in the OE market are small local companies which do not have the technical resources to meet the demands of the OEMs. Thus, even in a country like China or India with a substantial proportion of local tyre manufacturers, the OEM assemblers in those countries invariably buy tyres from the subsidiaries of multinationals in that country or from local firms with joint ventures with those multinationals.

16

Light Vehicle Tyres

Table 3.7 Market share of major companies in the OE tyre market 2002 North America % Europe % Japan % Big Three 82 58 73 Other major 14 38 27 manufacturers Other 4 4 0 Total 100 100 100 Source: Michelin As a matter of policy, most OEMs dual source for every model and spread their total purchase of tyres over three or four manufacturers. The bad publicity caused by the Firestone recall in North America has resulted in a significant move away from Firestone as a preferred brand. Bridgestone is making a virtue out of necessity in this by actively encouraging Firestone OE customers to switch to Bridgestone. Table 3.8 illustrates the variety of suppliers used by the Big Three car manufacturers in North America. Toyota is also shown alongside the indigenous companies as it is now approaching them in market share. Interestingly, it has a similar variety of suppliers with no marked bias towards Japanese manufacturers. Table 3.8 Tyre supply to North American OEMs 2003 (%) General Tyre Brand Ford Chrysler Motors Bridgestone 14 0 5 Firestone 17 0 0 Continental 0 15 0 General 17 23 0 Goodyear 34 34 78 Dunlop 0 0 0 Hankook 0 3 0 Michelin 4 15 16 BFGoodrich 10 3 0.5 Uniroyal 4 2 0 Pirelli 0 5 0.5 100 100 100 Source: Modern Tire Dealer Tyre Company Bridgestone Bridgestone Continental Continental Goodyear Goodyear Hankook Michelin Michelin Michelin Pirelli

Toyota 24 9 0 9 14 27 0 12 5 0 0 100

The type of tyre specified by the OEMs differs quite markedly from region to region because of the different vehicle mix sold in each market and the different driving habits. This is illustrated by the contrast between the North American and European OE markets where performance tyres account for over 50% of specification compared with only 13% in North America. The popularity of sports utility vehicles (SUVs) in North America shows up with 33% of specification on new vehicles whereas in Europe this only accounts for less than 5%, partly because there are far less SUVs purchased and partly because many of these are relatively small and use passenger car tyres.

3.5.2 Replacement Market Replacement tyre demand for light vehicles is usually less cyclical than OE demand, although economic factors do influence it. Worldwide, the replacement tyre market for light vehicles represented about 714m tyres (Table 3.9). As with OE markets the demand is concentrated in North America and Europe which together account for over two-thirds of the market but the developing markets, particularly in Asia, are growing rapidly.

17

Light Vehicle Tyres

Table 3.9 Regional demand for replacement tyres 2003 Volume (m units)

% of total

249 235 149 33 48 714

34.9 32.9 20.9 4.6 6.7 100

North America Europe Asia South America Middle East/Africa Total Source: Michelin

Forecast annual growth rate 2003-2008 +2 +3.3 +3.2 +2.2 +2.7 +2.9

Overall there is a healthy balance between mature and emerging markets. In mature markets – North America, Western Europe and Japan – there is slow growth of about 1.7% per year but compensated by the huge volume base giving an increase of about 50m tyres after four years. A similar total growth is achieved in developing markets but there the high growth rate of about 9% per year compensates for the much smaller market size. In both Tables 3.9 and 3.10 Asia shows relatively low growth as the large, slow growing Japanese market offsets the smaller but rapidly growing Indian and Chinese markets. The replacement tyre market is certainly more profitable for the tyre manufacturers but it too has its problems. Most of the large manufacturers have their own chains of retail outlets – equity chains – in important markets in order to maintain and develop their market share. However these chains have to compete with independent outlets, often both owned and managed by the same individual, and they find it very hard to compete profitably with such outlets. Companies such as Continental, Goodyear and Michelin have often put up with years of losses from their equity chains and they are continually exploring new ways to make them consistently profitable. So far no one seems to have succeeded in this for any length of time and there are signs now that some manufacturers are giving up the fight. Continental has sold its equity chain in the UK and Bridgestone is concentrating on a franchise network rather than owning its own outlets. However, Michelin appears to be going against the trend as it is adding to its Euromaster chain incrementally and is using it to promote broader marketing policies such as contracts with fleets and its OnWay insurance scheme whereby motorists are compensated for punctured or damaged tyres. 3.6 Market Characteristics The industry has long been regarded as a necessary but unexciting producer of commodity products. The two key characteristics of the market, closely related to each other, are that the industry is mature and slow growing and that the product is regarded as a commodity. Faced with this classic problem, the industry has been taking steps slowly to improve its position with classic solutions – reducing costs and increasing the value-added content of sales. The sheer size and global spread of the industry has militated against any rapid change, but the movement has been going on for the last decade. However, in the last three or four years the industry has attracted more attention from analysts and bankers, partly because of the debacle of the Firestone recall in the US and partly because of an increased interest in the automotive industry and its associated component suppliers. This focus of attention, particularly investors’ attention, on the industry has stimulated more urgent activity in bringing about change. It is arguable that Goodyear would not have come under such close scrutiny as it did during 2003 if it had not been for this changing attitude of investors. This theme of increasing change recurs throughout this report, but it is useful to place it in the context of what has been happening and why it has been happening. The most dominant feature of the market is that it is mature with many of the characteristics that typify such an industry.

18

Light Vehicle Tyres

3.6.1 Market Maturity Although there are cycles of demand, the long-term growth of the industry in volume terms has averaged just over 2% per year for the last eighteen years. Over the period, growth has been vigorous in some regions, particularly Eastern Europe and parts of Asia. However, the two largest regions – North America and Western Europe – which between them account for two-thirds of world sales, show the slowest growth as they are mature markets (Table 3.10). Table 3.10 World tyre industry long-term volume growth 1985-2003 Compound annual growth rate Region (CAGR) % North America 1.1 Latin America 5.3 Western Europe 2.2 Eastern Europe 7.6 Asia 4.0 Total 2.3 Source: Bowfell.net Growth in terms of value is rather more difficult to assess, as the strength of the dollar against other currencies in recent years has tended to flatter some companies whilst apparently handicapping others. However, an estimate by Deutsche Bank suggests that sales of the industry rose at 4.4% per year between 1991 and 1998. Since then, however, there has been a turndown in the market and revenues have fallen, partly because volumes are down and partly because intense competition leads to larger discounts in the marketplace. The problems of slow growth and market maturity are exacerbated by cyclical growth in one important sector of the market, supply to OEMs. The OE demand for tyres, not surprisingly, matches the output of the vehicle industry perfectly, and this is cyclical. Despite the poor profitability of sales to OE customers because of the purchasing power of the vehicle manufacturers, and even though the replacement market represents over 70% of the passenger car tyre industry’s sales, tyre makers’ profitability is also cyclical. This is because tyre makers have to have sufficient capacity to support cyclical peaks. A decline in OE demand drives down capacity utilisation rates and this is often compounded by negative pricing trends in the replacement sector as manufacturers attempt to fill their capacity with extra volume from the replacement tyre market. In contrast the replacement market is not particularly cyclical. Since 1975 there has only been one two-year consecutive decline (in the USA in 1979 and 1980). It is also a relatively profitable sector of the overall tyre market, but it cannot compensate for the vagaries of the OE market. A traditional indication of market maturity is continual pricing pressure in the market. Although the world tyre market appears to be an oligopoly, there are enough small competitors to keep continual pressure on prices. This, together with competition for market share between the multinationals, has typically meant that it has been very difficult to make price rises stick. As a result, the prices of popular tyres have fallen consistently over a long period. One of the largest selling tyre sizes in the USA demonstrates this. Average selling prices fell consistently between 1979 and 2000, averaging an annual price drop of 2.3% every year. After 2000 the price edged up by about 10%, probably because it was not being made in the same volume as before but in the most recent year the price dropped again. In broad terms the tyre which cost $69.90 in 1979 was selling for $41.02 in 2003. This simple comparison is enough to expose the problem that all tyre manufacturers have but if inflation is taken into account the picture is much worse. $69.90 in 1979 would be the same value as $185.43 in 2003. Electronic goods have declined in cost over that period but very few other items match the decline of tyre prices. Even cars have increased by 2.5 times over the same period.

19

Light Vehicle Tyres

3.6.2 Tyres as a Commodity The maturity of the market leads on to the perception of tyres as a commodity. In most markets the tyre manufacturers try to avoid this perception of their product. because if the consumer can see no difference between the products on offer, he/she will let price play a greater part in the buying decision. Unfortunately for the industry, more than half of all consumers regard car and light truck tyres as a commodity. This is both surprising and disappointing for the industry in view of the critical role that tyres play in vehicle performance and the significant commitment that has to be made to R&D. Perceived differentiation between tyres of an equivalent grade is minimal, and brand substitution is very common. The lack of brand loyalty is illustrated by the fact that 67% of consumers in the US and 50% in Europe replace their original equipment tyres with a different brand when the time comes to replace them. It is extremely difficult to develop a unique selling proposition (USP) or to sustain product uniqueness in the tyre industry. Consumers generally lack the information, expertise or ability to test and evaluate different tyres independently. In addition, with few exceptions, tyre manufacturers have proven adept at copying and incorporating technological innovations introduced by competitors. To make payback from innovation even more difficult, when one manufacturer introduces a truly unique feature or design, the OEMs are reluctant to accept it unless it is available from at least one other source. A case in point is the Michelin PAX design which requires a new wheel design for use. This has now been licensed to both Goodyear and Pirelli in order to make it more acceptable to the vehicle designers. Together these factors make it extremely difficult for tyre manufacturers to break out of the role of commodity suppliers with all the implications of that type of business – price competition, narrow margins and a reliance on aggregate balances of supply and demand. The method that many companies have tried in order to break out of this straitjacket is to develop strong brands, but this has proved to be extremely difficult in the tyre industry. It can be done in specific regions for a limited period of time, but it has proved impossible to translate this into higher earnings on a permanent basis or to develop this brand equity globally. For example, in India, Bridgestone is a relative newcomer, and it has succeeded in selling its light vehicle tyres at a premium to the market, much to the chagrin of Goodyear which has had a market presence for many years and cannot command a premium over tyres made by local Indian companies. In Europe, Pirelli has established a good reputation for its high performance tyres, but this has not helped sales of its volume products. Because differentiation has proved so difficult to achieve, market share has remained relatively stable over the last decade on a world scale. The leaders had approximately the same market share in 2003 as was the case ten years before (Table 3.11). Company Bridgestone Goodyear Michelin Continental Cooper Pirelli Sumitomo Total Top 7 Source: Tire Business

20

Table 3.11 World market shares 1991-2003 1991 % 1998 % 2001 % 17.5 18.7 19.8 15.6 15.4 18.3 20.0 18.4 19.0 7.2 6.5 7.1 1.7 2.1 3.6 5.5 4.0 3.7 6.2 7.0 4.0 73.7 72.1 75.5

2003 % 19.1 17.4 19.2 6.8 2.4 3.8 3.7 72.4

Light Vehicle Tyres

There are variations in market share from year to year but these are probably more the result of variations in the exchange rate between different currencies than relative successes in the market place. 3.7 Cost Structure The major companies within the tyre industry are all constrained by the laws of economics and subject to similar commercial pressures. As a result they react to the business environment in similar ways at any one time. In very broad terms the cost of tyre manufacture breaks into three parts: raw materials; labour; and fixed costs (Table 3.12).

Raw materials Labour Fixed costs Source: Industry estimates

Table 3.12 Tyre industry cost structure % of total costs 25 30 40-45

It is obvious from this simple breakdown of costs that the tyre industry has high fixed costs, making it extremely difficult to improve returns unless costs are cut or market share gained. Raw materials typically represent 25% of the selling price of a car tyre. Because of the extreme difference in selling prices between the OE market and the replacement market (prices for replacement tyres are typically about 80% higher than OE tyres), raw materials represent a much higher proportion of the selling price of an OE tyre than of a replacement – about 40% compared with 20%. The composition of tyres varies greatly so the figures in Table 3.13 can only be a general guide to cost but some general lessons can be learned. The largest raw material costs are for rubbers – both natural and synthetic – as between them they account for over 40% of the cost, but other components, particularly steel cord, are also significant.

Synthetic rubber Natural rubber Carbon black Steel cord Chemicals Fibres Total Source: Deutsche Bank

Table 3.13 Raw material cost breakdown % weight 28 19 24 13 11 5 100

% cost 24 17 15 18 16 11 100

The price of synthetic rubber is directly dependent upon the price of oil and many of the other materials are also very sensitive to this, so any change in world oil prices has a major effect on the tyre industry. Goodyear, for example, states that every $1 change in the price of a barrel of oil affects the operating profit by $25-30m, with the impact being felt within three to six months of the change. A certain amount of substitution is possible between natural and synthetic rubber, but even if this could be done quickly and completely, many of the price advantages would be lost as there is a correlation between the synthetic and the natural rubber price. When the price of synthetic rubber goes up, so too does the price of natural rubber, and vice versa.

21

Light Vehicle Tyres

Nevertheless, despite these relatively immutable relationships, the tyre manufacturers can usually pass on long-term price increases to customers. Over the last five years raw material price fluctuations have never been an issue to the industry; indeed, there is some evidence that price rises have been beneficial to overall profitability. However, there is no question that a period of falling prices makes it easier to improve margins than a period of rising prices. 2003 saw the price of natural rubber rise by 30% and rises of 10% are predicted for each of the two subsequent years. Synthetic prices have generally followed suit and this pressure on costs has forced all major manufacturers to raise tyre prices several times since 2002. Labour costs represent about 30% of sales. Of these just over half (50-60%) are for direct labour and the remainder for indirect labour. In North America and Western Europe wages are typically $20 per hour compared with, say, $4 per hour in low cost countries such as Eastern Europe, Latin America and especially Asia. It is scarcely surprising that the recent strategy of many companies has been to focus more on shifting production to low cost countries. This has been helped by relatively low transportation costs for the inter-regional movement of tyres – about $1-2 for a passenger tyre. Nevertheless, this still represents about 3% or 4% of the finished product, so there will not be a wholesale transfer of manufacturing to the Far East, as has happened with electronic goods, for example. A further factor reinforcing the presence of tyre plants in high labour cost countries is the need to be close to the market and the increased emphasis on flexibility in manufacturing. The fixed costs of the industry represent the single biggest element of expense. Left unchallenged, these expenses tend to grow in line with inflation, so the industry needs to achieve annual revenue growth of 3-4% just to maintain its existing margins. Any drop in turnover or worsening of business conditions has a strong negative impact on financial results for companies in the industry. It is in this area that manufacturers are now questioning assumptions that used to be an article of faith in the effort to trim costs. 3.8 Productivity Increases As all companies in the industry have similar cost structures and they are all subject to the same market forces, they tend to react in similar ways. There is a continual need to drive down costs, and this is demonstrated in a number of ways. Productivity improvements are essential year on year, but this in turn leads to a surplus of plant and equipment – overcapacity. There can be good reasons for an individual company to keep surplus capacity, even though it is generally accepted that the industry as a whole is suffering because of this but eventually individual companies are forced to bite this particular bullet. For many years the operating companies in both North America and Western Europe resisted closures but since 2000 there have been a succession of closures, particularly in Europe. In the last decade all manufacturers have tried to increase productivity in existing operations in order to become low-cost producers. Productivity improvements have been mainly the result of many small incremental improvements, but one major change that virtually all manufacturers have made is to move over to continuous three-shift, seven-day working. This took a long time to establish, and not without some long and bitter strikes, particularly in the US. Despite these problems there are now few plants owned by the multinationals which do not operate on this basis. Ironically there is now a move away from seven-day working because the market is becoming more fragmented and the companies now need to improve their flexibility in terms of product supply. Overall productivity improvements are generally in the range of 3-5% each year and this has been achieved for several years in succession, but it becomes a more difficult target each year as all the easy savings and improvements have been made.

22

Light Vehicle Tyres

3.9 Capacity Changes This continuing drive for improved productivity has resulted in excess capacity in many areas and product sectors. Some new plants have been opened to exploit new manufacturing technology and new manufacturing equipment has been installed in some existing plants. This, as well as leading to more efficient working, has greatly increased capacity, but until recently the major manufacturers have proved to be very reluctant to close plants, thereby eliminating higher-cost facilities and reducing overall capacity. This is not so much down to lack of will on the part of the tyre manufacturers but more because of the political and other consequences. Complete factory closure is an untidy and costly (in the short term) business, which almost inevitably raises opposition from local politicians and local and national labour representatives. One of the first to experience this was Continental in the mid-1990s when it moved production of car tyres from Traiskirchen in Austria to the Czech Republic. Even though, when the announcement was made, there was no mention of the factory being shut down completely, there were strong objections from the local community. They feared, quite rightly, that this would prove to be the start of a continuing erosion of the facility’s operations. Continental became enmeshed in long and acrimonious discussions with both the unions and the Austrian government. In late 1998 plans were announced for a doubling of the remaining production at Traiskirchen to 1m tyres per year in 1999, and undertakings were made for both sides to make their best endeavours to retain production at that site. However, it proved to be in vain as in December 2001 Continental announced that it would stop all tyre manufacturing by July 2002. As a sop to local opinion, certain mixing and calendaring functions have been retained on the site, but the prospects for this operation can scarcely be regarded as secure. Despite the problems involved in closing plants, the pressures to do so have remained and all the main manufacturers have now taken decisive action to make major operational savings (Table 3.14). They were slow to do so at first – Continental’s tribulations at Traiskirchen served as a warning to the whole industry – but after initial hesitation, a large number of difficult decisions have been taken. The majority of these were taken in 2001 and early 2002 and since then there have been a steady trickle of further closures or capacity reductions in Europe as the realities of the new world order began to be felt. Not only was the real market growth away from Europe but cheaper labour was also available in abundance. Supply estimates are not a precise figure as output can be varied to some extent and production can be switched from one type of tyre to another, but it is possible to make informed estimates of the overall position in each region. North America is roughly in balance but there has been a substantial overhang of capacity in both Europe and South America. Asia too has more capacity than it can justify in terms of its own market but the cheap labour resources in that area mean that the plants can produce for export to areas with higher labour costs. The major manufacturers have been acutely aware of the capacity problem, but for reasons already discussed, have been slow to act. Now, however, a concerted effort is being made to reduce capacity and to close plants in order to bring supply and demand more nearly into balance. Table 3.14 lists the major decisions taken in recent years by the multinationals to either close or greatly reduce production. Although the first of these closures took place in 1996, the great majority were announced in 2001 or the first part of 2002 even though they are only now coming into effect. Once one company has committed to closures it is easier for all the others to follow suit. The overall outlook for the tyre industry is dependent upon supply much more than demand. Demand is relatively predictable and not very volatile, even if cyclical. Above all it is inelastic. If tyre prices were to decline by, say, 5% from current levels consumers would not be motivated to replace their tyres any faster. In contrast there is a close relationship between aggregate supply and profitability for individual tyre companies. Companies will not receive any revenue benefit from increased demand if prices decline. Nevertheless, because of high fixed costs, tyre manufacturers with excess capacity are invariably the instigators of downward price movements as they attempt to

23

Light Vehicle Tyres

gain volume by increasing their market share, thereby increasing their own capacity utilisation. The closures and decommissioning highlighted in Table 3.14 will undoubtedly contribute towards reducing excess world capacity, as they represent approximately 8% of world capacity, but there is still a long way to go in order to bring demand and supply into balance Table 3.14 Major capacity reductions 1995-2003 Decatur, Ill USA UK Newbridge Ireland Dublin Belgium Herstal Sweden Gislaved Germany Vergoelst Austria Traiskirchen Mexico Guadajara UK Goodyear Birmingham UK Wolverhampton France Montlucon Philippines Marikina Greece Thessalonika Argentina Buenos Aires Italy Cisterna Mexico Tultitlan Australia Thomastown Australia Footscray Mexico Michelin Querataro Mexico Tacuba Philippines Manila UK Stoke-on-Trent Sweden Kungalev Greece Pirelli Patras US Hanford, Cal Source: Industry announcements Bridgestone Continental

3.10 Production Relocation The capacity problem is complicated, and in many cases exacerbated, by the rapidly growing markets and the availability of cheap labour in the developing world. This is at its most pronounced in China and India but other parts of Asia and, to a lesser extent, Eastern Europe also offer attractions to multinational companies. The movement has been taking place, not just as a simple closing of plants in one area and opening new plants in another. This is the most obvious manifestation of the trend but offtake agreements and joint ventures can lead to a real shift in resources over time. At first this took the form of making acquisitions in low labour cost countries, particularly Europe. With the break-up of the Soviet bloc, western manufacturers made major acquisitions in the countries of Eastern Europe (Table 3.15). Part of the reason for this was to establish a presence in new markets, but a major factor was the availability of low-cost labour adjacent to the large market in Western Europe. A similar process has been happening in South America, with Continental buying Grupo Carso in Mexico and Michelin buying Icollantas in Colombia, though in both these cases the main attraction was to develop a presence in the local market. The availability of relatively low-cost labour adjacent to a major market (USA) was an additional reason for these acquisitions, but by no means the main one. However, multinational companies have other ways of shifting production to cheaper areas than by

24

Light Vehicle Tyres

the obvious (and expensive) acquisition route. Differential investment in existing low-cost and high-cost plants can achieve the same result, albeit over a longer period of time. Michelin took a different approach by buying a shareholding in Hankook. Again, the reason was twofold; to gain an entry into the protected market of South Korea and to obtain low-cost manufacturing facilities. Table 3.15 Acquisitions in Eastern Europe 1995-2003 Year Country Target Acquirer 1995 Poland T C Debica Goodyear 1995 Poland Stomil Olsztyn Michelin 1996 Hungary Taurus Michelin 1997 Slovenia Sava. (part) Goodyear 1997 Czech Republic Barum (part) Continental 1998 Slovakia Matador (JV) Continental 1998 Poland Stomil Poznan (JV) Bridgestone 2001 Romania Tofan (part) Michelin 2002 Russia Moscow Tyre (JV) Continental 2002 Serbia Tigar AD (JV) Michelin 2004 Slovenia Sava (part) Goodyear Source: Company announcements Cooper Tire, which has always been very focused on the American market, is now looking to China for low-cost supplies. In October 2003, it announced an outsourcing agreement with China’s Hangzhou Zhongce Rubber Co. Ltd. to make Cooper’s radial medium truck tyres, which currently are produced solely by the Albany plant, at Hangzhou´s plant in China. Cooper will move most of its equipment from Albany to China. It is now taking this one step further by announcing in December 2003 that it would establish its own factory in China in a joint venture with Taiwan’s Kenda Rubber Industrial Co. Ltd. to build a plant for radial passenger and light truck tyres. Although both companies have eyes on the growing Chinese market, the initial production is reserved for export to the USA in the company’s various brands. Cooper and Kenda have cooperated in the past, with Kenda supplying Cooper with bias-ply light truck tyres since 1999 for North America and radial car tyres since 2000 for Europe. However, the latest moves go far beyond a simple offtake agreement. As transport and logistical costs are relatively low, there are very significant savings to be made by substituting low-cost for high-cost labour. Assuming that half the direct labour production is moved to low-cost countries, the savings could be as much as 10% of the tyre selling price. Continental has been the most active in making this move, mainly because the bulk of its production was located in high-cost areas of Western Europe, particularly Germany. It began by building up production at its relatively low-cost plant in Portugal and then gradually closing plants in Ireland, Scotland, Austria and Belgium as well as reducing production at its Hanover, Germany headquarters. The process was accelerated when it opened a joint-venture plant with Matador in the Czech Republic for passenger tyres and in Slovakia for truck tyres. The new Romanian plant at Timisoara, which is now in production will give it an even lower cost base. In 1995 it produced 20% of its passenger car tyres in low-cost countries; by 2003 it had increased this proportion to 50%. The benefits of this strategy are already becoming apparent for Continental. In 2002 Michelin began to terminate OE contracts which were particularly unprofitable. It first refused the Peugeot 307 platform, then the new joint small Renault/Nissan (Clio/Micra) platform and then a Saturn contract. In May 2002 it took the bigger step of dropping all OE business with GM Europe, (including Fiat business included under the GM-Fiat purchasing umbrella). It appears that Continental has been able to pick up a large slice of this business, and it has probably been able to do so profitably because of its low labour costs in Eastern European production locations.

25

Light Vehicle Tyres

3.11 Consolidation Another natural and more aggressive response to market forces which pressure margins is for companies to look for ways of reducing competition. The obvious way to do this is to acquire rivals, thus reducing the number of active competitors. The most dramatic moves occurred nearly 20 years ago when there was a short period of frenetic activity and the industry structure changed very quickly, but the repercussions of those acquisitions are still being felt today. Before 1985 a dozen large companies dominated the world tyre market, but after a rapid series of mergers and acquisitions, seven companies emerged with three-quarters of the market. Table 3.16 demonstrates how the rankings of the leading companies have changed between 1978 and 2003 and how many of the leading names have been taken over.

Rank

Table 3.16 Changing structure of the world tyre industry 1978-2003 1978 2003 Company Country Company Country Goodyear USA Michelin France Michelin France Bridgestone Japan Firestone 1 USA Goodyear USA Bridgestone Japan Continental Germany Dunlop 2 UK Pirelli Italy Uniroyal 3 USA Sumitomo Japan 3 Goodrich USA Yokohama Japan Pirelli Italy Cooper USA General Tire 4 USA Kumho South Korea Yokohama Japan Toyo Japan

1 2 3 4 5 6 7 8 9 10 Note: 1 Acquired by Bridgestone 2 Acquired by Sumitomo Source: Bowfell.net, Tire Business

3 Acquired by Michelin 4 Acquired by Continental

Of the ten leading companies in 1978, only five are now still independent in 2002. The first move in the succession of mergers and takeovers was made in the Far East and had little to do with the activity that was to follow. In 1981 Sumitomo Rubber Industries, a relative newcomer to the tyre industry, bought a controlling interest in Ohtsu, a fellow Japanese manufacturer that had experienced difficulties because of the 1979 oil shock. Four years later Sumitomo again found itself in the right place at the right time. In Europe, Dunlop, one of the best-known brand names in the world tyre industry, had tried to achieve a higher world rank by merging with Pirelli. This illfated merger proved to be a disaster for both parties, and it was disentangled after a brief period, leaving Dunlop on its own again with a strong brand name and weak management – an ideal acquisition candidate. BTR, an expanding conglomerate with no interest in tyres, bid for Dunlop in 1985 and eventually succeeded in taking over the company. In order to pay for the acquisition, it sold off most of Dunlop’s tyre interests, together with the sporting goods business, to Sumitomo. Sumitomo could interpret this as a defensive move because it had previously been the licensee for the Dunlop name in Japan and it needed to protect that business. However, it set other companies thinking about the structure of the industry and their own future role. The round of aggressive takeovers began in 1985 in a small way with Continental’s acquisition of Semperit, a small Austrian producer, and in the following year two mid-sized US producers, Uniroyal and BF Goodrich, merged in a defensive manoeuvre as both companies were losing market share to stronger rivals. The real change in attitudes came about later in 1986 when Sir James Goldsmith put together an ambitious and highly leveraged bid to purchase Goodyear, the biggest tyre company in the world at that time. This particular bid failed, but it was a landmark, not just in the tyre industry but in the much wider field of financial mergers and acquisitions. It

26

Light Vehicle Tyres

demonstrated that there was finance available for well-constructed proposals, and it also demonstrated that even the biggest of companies could be vulnerable. The new thinking led to a spate of cross-cultural mergers. First, Continental of Germany successfully bid for General Tire in the US. This was then followed by the most dramatic takeover of all, Bridgestone of Japan making a successful bid for its old mentor, Firestone. Pirelli then acquired Armstrong Rubber of the US, and Yokohama, emboldened by its compatriot’s success, acquired the much smaller Mohawk Tire. Finally Michelin made a successful bid for the ill-fated Uniroyal-Goodrich, which had already sold its European operations and licensed the Uniroyal name in Europe to Continental. In the meantime, Pirelli had also made a long drawn-out attempt to acquire Continental in order to form another European company capable of challenging Michelin, but in the end it failed because key German shareholders were opposed to the idea. Consequently, Michelin’s acquisition of Uniroyal-Goodrich was the last shot in a hectic battle that had lasted five years and completely changed the structure of the world tyre industry. A few small acquisitions followed, such as Continental’s purchase of Gislaved and Viking in 1992, but the industry needed time to digest and to respond to the changes that had occurred. A summary of mergers and acquisitions from 19811992 is given in Table 3.17. Table 3.17 Merger and acquisition activity 1981-1992 Acquirer Target Sumitomo (Japan) Ohtsu (Japan) BTR (UK) Dunlop (UK) Continental (Germany) Semperit (Austria) Sumitomo (Japan) Dunlop (part only) Uniroyal (USA)1 BF Goodrich (USA)1 Finance consortium 2 Goodyear (USA) Continental (Germany) General Tire (USA) Bridgestone (Japan) Firestone (USA) Pirelli (Italy) Armstrong Rubber (USA) Pirelli (Italy) 1, 2 Continental (Germany) Yokohama (Japan) Mohawk (USA) Michelin (France) Uniroyal-Goodrich (USA) Continental (Germany) Gislaved & Viking (Sweden)

1981 1985 1985 1986 1986 1986 1987 1988 1988 1989 1989 1989 1992 Note: 1 Merger 2 Failed Source: Bowfell.net

What had started out as a few minor adjustments and some defensive moves to protect tyre suppliers’ own interests had quickly evolved into a frantic struggle for market share and a presence in different markets. History seldom repeats itself, but it is perhaps worth examining the results of the last round of changes. The driving force behind most of the acquisitions was foreign companies’ desire to increase their presence in the key North American market. Three acquisitions were eventually successful: Bridgestone’s acquisition of Firestone; Michelin’s takeover of Uniroyal-Goodrich; and Sumitomo’s purchase of Dunlop (which had a significant presence in North America). Of the others, the results have been less happy. Yokohama’s acquisition of Mohawk was a good buy in terms of assets purchased and the price paid for them, but the company was not big enough to remain viable in the US market, even with the addition of Yokohama’s existing import business. It is still making a loss many years after the purchase, and it has done nothing to help Yokohama. Pirelli’s acquisition of Armstrong was followed by closures, reductions and rationalisations, even though Pirelli insisted it was happy with the original decision. Finally, in 2001 the company at last

27

Light Vehicle Tyres

threw in the towel and closed its sole remaining plant in Hanford, California. Continental fared little better. At the time it paid far too much for General Tire as the company had old and poorly maintained factories as well as a poor brand image. It paid for this error of judgement with a stream of losses which carried on until the late 1990s but it eventually brought it back to profitability after a lot of capital investment. However, this lasted for only two years and since 2000 the North American operations have reverted into losses. Both Pirelli and Continental had intended to make premium quality tyres at their new acquisitions, but the plants were unsuitable and the existing brand image was inappropriate. Continental has now almost achieved that objective but only after years of investment and management time. Pirelli failed completely. Even the companies that have managed to make a success of their purchases have had to make very large investments, spending far more than they anticipated, in order to make factories competitive. The record of rationalisation is therefore rather mixed. Immediately after the last round of consolidation the world market slipped into a mild recession, and this exacerbated the restructuring problems facing all the mergers. As well as plant closures, there were long and acrimonious battles with the unions as each company tried to negotiate more flexible working practices. This battle was eventually won, as it had to be, because the whole industry was moving towards continuous shift working in order to improve productivity, but in order to win it both Bridgestone and Michelin had to endure long strikes. The day of the huge global acquisition would now seem to be over. From time to time there are rumours that Pirelli would like to dispose of its tyre interests or that Continental would concentrate on its braking and suspension activities, but these are no more than speculation. No new player is likely to want to enter the tyre industry as the slow growth prospects and narrow margins make it unattractive. At the same time the big three players – Bridgestone, Goodyear and Michelin – already have a global network and are enjoying good economies of scale in such areas as R&D, brand management and purchasing. There is no real incentive for them to make such large acquisitions for such little return, leaving aside the problems that could be encountered with competition authorities in both North America and Europe. Attention has now turned to other methods of consolidating the industry and extending global reach. There are still some small acquisitions taking place, but these are either medium-sized firms developing new markets (Cooper purchasing Avon) or large firms filling in weak parts of their global network (Michelin buying Icollantas of Colombia; Goodyear strengthening its control of South Pacific Tyre). Rather than acquisitions or even mergers, the trend now is for firms to form alliances or joint ventures. Goodyear and Sumitomo Rubber announced the largest and most dramatic of these. The two companies had been developing closer links for several years, but in 1999 they announced a comprehensive series of joint ventures, pooling their resources in several major markets across the world. Essentially Goodyear has dominated this alliance, taking control of the North American and European operations as well as R&D and purchasing, but the importance of the alliance is that it was the first formal link between a Japanese and a western company. Ironically, although Goodyear has had more operational control than Sumitomo, it has over-reached itself in terms of the debt it took on and it has been in thrall to its bankers since early 2003. Sumitomo, meanwhile has gained in strength and reported growing profits. Since this major collaboration there have been a number of smaller joint ventures, but most of these have been in areas where acquisitions are politically difficult. Both Bridgestone and Michelin have formed joint ventures in China in order to give them a foothold in this vital emerging market. However, the trend does seem to be towards larger and more formal alliances. Cooper and Pirelli formed a partial alliance with the idea that Cooper could help the sales of Pirelli in North America whilst Pirelli could perform the same service for Cooper in South America.

28

Light Vehicle Tyres

Although sound in theory, this failed to work in practice and the alliance has now been substantially altered to let each party play to its strengths. Yokohama and Continental have now formed an alliance, although it does not appear to be as formally based or as far reaching as the Goodyear/Sumitomo alliance. In February 2002 Yokohama and Continental signed a formal contract to set up a joint-venture company to meet the needs for OE tyres for Japanese carmakers and a contract to cooperate in expanding Continental's replacement tyre sales in Japan. The two companies also signed a contract for exchanging their technology. These contracts were based on a Letter of Intent signed in June 2001 for closer collaboration in both companies’ global tyre businesses. In April 2002, Yokohama Rubber became the exclusive importer/distributor of Continental tyres in Japan and started distributing Continentalbrand and other main tyre brands of Continental for passenger cars as well as tyres for industrial vehicles. Yokohama and Continental are also continuing to discuss a closer tie-up in the field of tyre production and technology in the North Atlantic Free Trade Area (NAFTA). The two companies are evaluating concrete cooperation on improvement measures for quality, cost and delivery, including the unification of product specifications, the exchange of production items and cooperation in product distribution. Both companies have joined with Bridgestone in promoting the different concepts for runflat tyres developed separately by Bridgestone and Continental. This is probably more a reaction to the group of licence holders that Michelin has built up for its PAX tyre than the harbinger of a closer relationship between the three companies. A more traditional method of consolidation than the new concept of alliances is the old-fashioned method of buying shares in a company and both Bridgestone and Michelin have followed this route recently. In April 2003 Bridgestone acquired an 18.9% ownership stake in Nokian Tyres, by agreeing to buy Nokia Corp.’s 2 million shares of Nokian Tyres for $73.2 million. Bridgestone said it intended Nokian Tyres to continue as an independent company. The two firms stated that they would examine ways to complement each other’s product development, testing and distribution operations but this could obviously develop into a much closer co-operation. At about the same time Michelin and Hankook signed a partnership agreement, apparently involving co-operation in R&D, manufacturing and distribution. Hankook would be licensed to produce Michelin's PAX runflat technology as part of the agreement. Michelin took a 10% stake in the Korean company, which, based on the share price when the deal was signed, is estimated to have cost just over US$33 million. However, it emerged later that there was more to the agreement; it was not just technical co-operation but is a more wide-ranging agreement than originally disclosed, according to analysts who cover Hankook. The deal offers Hankook access to Michelin’s distribution networks in Europe and North America and gives Michelin a chance to tap into Hankook’s low-cost manufacturing in Korea and China. Michelin now will ship Hankook tyres through its own distribution networks in Europe and North America, allowing Hankook to reduce the complexity of its distribution and thereby lower its distribution costs while retaining more of its margins for itself. Michelin, in return, gains access to Hankook’s low-cost production in China – where Hankook has committed about $250 million over seven years to triple output – and to Hankook’s Korean distribution network and OE presence. Michelin plans to source about 9 million to 10 million BFGoodrich-brand tyres from Hankook plants for sale in North America. This would seem to be the future direction for the tyre industry – formal alliances, informal partnerships and minority share purchases rather than outright mergers or acquisitions. In the last five years 14% of the global industry has consolidated, so these less dramatic agreements can still have a major influence on the structure of the industry. These actions and reactions to the prevailing economic conditions by the companies in the industry ensure that the industry is continually evolving. It may not be a fast growing or particularly profitable industry at present but the major players are trying to position themselves to take what advantage they can in the prevailing circumstances. In so doing they are changing the shape and the structure of the industry.

29

Light Vehicle Tyres

30

Light Vehicle Tyres

4 Manufacturing 4.1 Introduction Until this last decade, tyre manufacturing had developed little from the time when it was first massproduced. In the early days of tyre manufacturing there were a steady stream of improvements – treads, bead wire, steel reinforcement – which all improved the product, and altered the manufacturing process but from the 1920s onwards these structural and material changes altered little. The introduction of the radial tyre, the only truly innovative development that the industry has produced, in the 1950s and 1960s was a major change, requiring completely new machinery. Indeed, the cost of this replacement was a major factor in the decision by the big American companies to delay changing over to radials. However, this was a product improvement, and even that was fifty years ago. There have been no comparable advances in process improvement since 1920. For much of its history, tyre making has been a multi-stage and highly labour intensive industry, involving building up the tyre carcass manually, in layers on a drum. Each layer of material is often cut to length by hand before going off to be encased in its sidewall and tread components and then vulcanised. The introduction of automated processes has tended to be gradual and partial; evolutionary not revolutionary. Modern plants now have sequenced feeds and autocutting of materials to the building drum, but the whole process would still be recognisable to the manufacturers of the 1950s. This is all now beginning to change, as first Michelin and then most of the major tyre manufacturers have announced radical new manufacturing processes which promise dramatic improvements in investment costs, productivity, material saving and quality standards. Unfortunately, although eager to announce these general improvements, the tyre manufacturers are all extremely reticent about disclosing the details of their processes, so it is difficult to find out exactly how the tyre is made, let alone compare the process in one company with another. However, cumulatively there is no doubt that a paradigm shift is taking place in the industry, which will change the economics of tyre manufacturing and the marketing fundamentals of tyre distribution. In order to understand these changes, it is worthwhile examining how tyres are made at present and then reviewing the pressures on the industry that have brought about these proposed and actual changes to the manufacturing process. The various manufacturers’ solutions are then compared, before examining the implications these changes will have for the industry as a whole. 4.2 Materials Table 4.1 Tyre materials Material Natural rubber Synthetic rubber Total rubbers Filler Steel Chemicals Textiles Total Tyre weight (new) Tyre weight (scrap) Source: Rubber Manufacturers Association

% weight 16 30 46 26 12 12 4 100 11.3 kg 9.0 kg

31

Light Vehicle Tyres

Tyres are composed of many more materials than just rubber, and each of these constituents is complex on its own right, so that variations in formulae can result in marked differences in final tyre performance. Although the tyre is a highly engineered product, it owes as much to chemistry as it does to physics, and each of the materials making up the final mix has an important role. To put these in context, Table 4.1 lists the major classes of materials in a passenger car tyre by the proportion of total weight that each represents.

4.2.1 Rubber Rubber is the classic polymer; a compound of high molecular weight made up of a linked series of repeated simple monomers. It was the first polymer that was used in any great volume and it has some unique properties. It can seal gaps, absorb noise and offers a soft, yielding surface, which is far more comfortable to hold than either greasy plastics or cold metals. At first its composition was not understood but research gradually opened up its secrets and synthetic rubbers have gradually been introduced throughout the last century. The quality of these rubbers has gradually improved and new synthetics have been developed with specific properties for use in various key parts of the tyre. Production of synthetic rubber achieved parity with natural rubber in 1967 and since then more synthetic rubber has been used in tyre production than natural rubber. Natural and synthetic rubbers are interchangeable to a certain extent, and the proportions used in tyre formulae can, and do, vary from time to time. The key factor in this decision is usually price; when the price of oil goes up synthetic rubbers become more expensive and demand for natural rubber increases as a substitute. The reverse is also the case; when natural rubber is in short supply the price rises and synthetic rubbers are in more demand. This process can only be taken so far in either direction, as the formulae for each type of tyre are developed in order to give the finished product specific properties. There is a limit, particularly in the short term, as to the amount of substitution that can take place. Broadly, natural rubber is used when its key technical properties are in demand. These include low hysteresis losses, good green tack and good crystallisation properties. At the same time, it has disadvantages that can militate against its use. It is sensitive to reversion so, when it overheats in service, the performance deteriorates relatively quickly compared with many synthetics. The chief problem is contamination, which is found in a relatively high proportion of bales of natural rubber. Typically contamination rates are from 0.03% up to 0.2% compared with synthetic rubber, where contamination is virtually non-existent. Natural rubber also has a broad viscosity spread. Whereas the repeatability of synthetic rubber is within 1 Mooney unit (a measure of the resistance of unvulcanised rubber to deformation), for natural rubber it is around 4.5 units. This variability of viscosity can cause considerable problems at the mixing stage and tends to discourage the use of natural rubber. Both of these negative qualities are linked to the agricultural origins of natural rubber. The material often gets contaminated with slivers of wood or particles of grit, and these contaminants become points of weakness in the final product. Any small particle embedded in the rubber acts as a stress concentrator, increasing the actual stress at that point by a factor of three or more over the theoretical bulk figure. This can reduce the life of a tyre dramatically as, for example, a truck tyre is often designed for a life of one million kilometres and well over 300 million load cycles. However, perhaps the worst handicap for natural rubber in comparison with synthetic rubbers is the lack of technical backup. Variations in the polymer are much bigger than in the manmade synthetic rubbers, yet the latter usually have strong technical backup from the manufacturers. In contrast the technical support for NR is virtually non-existent. Table 4.2 summarises the advantages and disadvantages of the different types of rubber commonly used in tyres.

32

Light Vehicle Tyres

Table 4.2 Advantages and disadvantages of different rubbers Type Advantages Disadvantages Variable uniformity of quality Natural rubber (NR) Tear strength Ageing resistance Wear resistance Fatigue resistance Impact resilience Ozone resistance Low heat generation Impact resilience Styrene-butadiene rubber Processability Heat generation (SBR) Uniform quality Ageing by heat Frictional force Tear strength Butadiene rubber (BR) Impact resilience Wear resistance Low temperature properties Fatigue resistance As NR Isoprene rubber (IR) As NR plus plus High Cost Consistent quality Impact resilience Halogenated butyl rubber (IIR) High air impermeability Heat generation Ozone resistance Adhesion Fatigue resistance Source: Toyo Tire The choice of different types of rubber when designing tyres depends on prices, processing and service requirements. As outlined above, rubber prices are important as they dictate what rubber is bought which affects manufacturing routines such as formulations, mixing procedures, vulcanisation conditions etc. This will all have an effect on the overall manufacturing cost. Processability includes the ease with which rubber can be mixed, shaped and vulcanised, together with its convenience in terms of presentation. Natural rubber usage first fell below that of synthetic rubber in 1965, and by 1985 it had slipped to only 30% of total rubber use. However, it is gradually increasing its proportion of the rubber market once again, and it has now reached about 40% of the total. The main reason for this is ongoing research which is finding new or better uses for natural rubber. For instance, oil extended natural rubber (OENR) has made an impact on winter tyre treads. Trials in Sweden showed that unstudded OENR treaded tyres had a better grip on ice and snow than studded synthetic rubber treads. Consequently it was able to take over from studded tyres when the ban on the use of studs came in as authorities recognised that in melted sections the studs tore up the road surface. Another factor which is likely to become much more important is the environmental impact of NR compared to SR. It is estimated that only 16 GJ (gigajoules) of energy is required to produce one tonne of natural rubber, whereas a synthetic rubber such as SBR requires 130 GJ, more than eight times as much. The natural product also plays an important role as a carbon sink. The geographic development of the world tyre industry could also affect the balance between NR and SR. It is likely that synthetic rubber will make gains at the expense of its natural counterpart in the less developed industrial regions as they start to manufacture more sophisticated products. This is already forecast to be happening in China, and it is likely that other developing economies in Asia will follow a similar pattern at a later stage. Set against this, it is likely that Russia and the CIS (Commonwealth of Independent States, formerly USSR) will begin to use more natural rubber as the economy opens up and the rubber industry begins to compete in the world market.

33

Light Vehicle Tyres

4.2.2 Carbon Black Traditionally tyres are black in colour, although rubber itself varies from pale to dark brown. The colour is achieved by the addition of carbon black, a very important filler material used to strengthen or reinforce the rubber compounds and to extend tread life. In the early days of motoring french chalk was used as a filler, making the tyres greyish-white in appearance. It was used to bulk out the more costly materials rather than adding any unique properties to the mixture. In 1907 Pirelli started to add carbon black as a filler and discovered that this improved the wearing properties of the tyre. Other tyre manufacturers also began using carbon black. There was a transitional period at first with tyre treads using carbon black because it was there that abrasion resistance was most important, whilst the sidewalls remained white because they still used chalk. However, when it was realised that the black also constituted a barrier to degrading ultraviolet light, carbon black was used for this component as well. Carbon black, also known as lampblack or channel black, is made from heavy aromatic tar oil, a petroleum-based feedstock. The oil is pumped into a specially designed furnace, where it is heated above 2,000° F. This process ‘cracks’ the oil to produce a gas stream laden with carbon black powder. The particles result from incomplete combustion in the reaction furnace. The gas stream passes through a series of filters, where the carbon black is separated from the gases. The carbon black powder then is bound with water to create larger beads or granules, which are passed through a dryer and packaged for delivery. The small particles typically used in tyre rubber make the compound harder and improve the wear resistance of the material, but at the same time they allow a higher heat build-up and reduce the elasticity. A renaissance in carbon science seems to be happening, stimulated by the greater understanding of the structures developed. Despite the fact that this field is widely seen as mature, with processes, products and applications that are well established, there is plenty of scope for advances in understanding. The wind of change is also blowing in carbon black production technology, where manufacturers are using a process that has changed very little over the last 60 years. The process is characterised by very poor yields, of 35 to 65%, and is also environmentally damaging, producing SOx, NOx and CO2 emissions. Up to 50% of the carbon is wasted in CO2 production, Carbon black has been used as the filler of choice for tyres since the 1920s, although it is now receiving competition from silica. The three largest producers of carbon black are Cabot Corporation, Degussa and Columbian Chemicals, but many petrochemicals manufacturers also produce it. Between them, these three produce about 54% of supply with the remainder accounted for by 20-30 other companies. Tyre production takes around 70% of the world carbon black production of 8,500 kilotonnes. As with tyre production, carbon black manufacture is moving towards the growth markets, particularly Asia, and small companies in India and China have shown exceptional growth in the last few years. Over 30% of world capacity is now in Asia and this proportion is growing at the expense of North America and Europe (Table 4.3). Table 4.3 Carbon black production by region 2002 Region % North America 25.97 Asia-Pacific 33.86 Western Europe 15.68 Eastern Europe 13.79 South America 5.0 Africa 3.7 Source: Hi-Tech Carbon Carbon black is a business that has been plagued by overcapacity for decades. The average growth rate of the industry is 1-2% per year, roughly paralleling the expansion of the rubber business. The overcapacity problem combined with weak demand growth has put a strain on profits. To make

34

Light Vehicle Tyres

matters worse the industry has been the centre of two political disruptions in the last two years. It complained about dumping into the European market by Russian and east European manufacturers. Although this complaint was upheld by the European Commission, it was overturned by the Council of Ministers of member states, no doubt because they calculated that there were more votes from the tyre industry than from carbon black workers. However, competition authorities in the US and Europe mounted a joint investigation into price-fixing by the industry. This could well be the result of tyre manufacturers putting pressure on the industry but the investigation is still ongoing. However, in the first months of 2004 all three of the big producers announced better profits from their carbon black business, partly as a result of higher prices holding and partly because all three are moving production to lower labour cost countries in Asia, which also happens to be where the market growth is. Prices have been rising in the last two years because of the price of oil and carbon black producers also have been challenged by the costs of complying with strict new environmental regulations to control air and water emissions at their production plants. Meanwhile, such other products as silica and the silanes are being touted by their producers as environmentally benign substitutes for carbon black. Silica is claimed to promote lower rolling resistance in tyres, which saves fuel and it may soon capture up to 25% of the carbon black market in tyres.

4.2.3 Silica Silica has taken a long time to be adopted as a filler because it is so difficult to mix with rubber. However, the pioneers persevered as there were major advantages to the material if it could be processed efficiently. Much of the development work was carried out over fifteen years by RhonePoulenc in collaboration with Michelin, and Rhone-Poulenc’s successor company, Rhodia, is still a major supplier of silica to the tyre industry. Silica-filled rubber reduced the rolling resistance of tyres markedly but initially it had a detrimental effect on other tyre properties such as traction and durability. Chemical solutions were developed, particularly by combining highly dispersible silica with polysulfide bis-alkoxysilanes but in addition it is being found that different processes have to be used to maximise the benefits of silicasilane compounds. The raw material mix must be compounded in multiple non-productive mixing steps. The nature of the silica surface and the reactivity of the silanes employed necessitate this more time-consuming approach. The market for precipitated silica is between $800 million to $1 billion a year and growing at twice the rate of the tyre industry as a whole. The largest precipitated silica players, accounting for about 75% of the market, are Degussa, Rhodia, PPG and J.M. Huber. However, it is used in a wide range of applications, not just tyres. The tyre industry accounts for about 53% of the demand for silica. Table 4.4 Advantages of silica usage in tyre components Tyre component Benefit Bead insulation Adhesion Bead fitter Stiffness Inner liner Air impermeability, strength Carcass plies Adhesion, strength Belt edge Adhesion, tear resistance Steel belt Adhesion Lower sidewall Stiffness Sidewall Strength Undertread Tear resistance Main tread Lower rolling resistance, traction, wear Source: Autobusiness

35

Light Vehicle Tyres

Despite the ongoing problems with silica, it is being used increasingly by the industry because of the improvements it can make to tyre performance. As well as its capacity to improve wet grip and to reduce the rolling resistance of the tyre, it can improve compounds in other parts of the tyre (Table 4.4). Like the carbon black industry, silica producers have soon found themselves in a commodity market. Large amounts of manufacturing capacity were built in Europe immediately prior to the economic slowdown starting in 2001, and these have remained under-utilised, leading to intense price competition in the sector. Overcapacity, compounded by stiff competition from Chinese producers and the downturn in the global economy, led to a shakeout of some of the smaller suppliers of colloidal silicas, precipitated silicas, and silica gel. The larger suppliers like Grace Davison and Rhodia were able to shift their surplus among their various facilities around the world, but profits fell, and capacity utilisation levels are still well below optimal. Most new cars in Europe are now factory-fitted with green tyres, so there is little room for growth in the OEM market. The key now is to get silicas into replacement tyres and truck tyres, and to incorporate silicas into more of the tyre body than just the treads. Demand for precipitated silica in tyres is likely to grow at 4% per year over the next five years and this period will also be marked by a distinct growth in production facilities in Asia.

4.2.4 Steel Cord Steel cord is used in all radial tyres, both for passenger cars and for trucks, as a reinforcement, and it is also used in the tyre to form the bead which secures the tyre to the wheel. Consequently demand is growing slightly faster than the industry as a whole because of the continuing gradual move from bias tyres to radials. This conversion has already happened in the developed countries but a considerable proportion of tyres in developing countries are still the bias design. Steel is superior to other reinforcing materials in the critical properties that affect tyre performance, but it needs considerable skill and experience to make the steel adhere to the rubber. Consequently the less sophisticated tyre manufacturers in developing countries have been slow to develop radial tyres, preferring the simpler techniques of fabric reinforcement. The cord is made from multiple layers of wire filaments with diameters ranging from 0.15 mm to 0.38 mm. These are wound together to form a strand and several of these are wrapped to form a cord. The manufacturing process runs high level carbonaceous steel wire through a die numerous times. In the course of this process heat treatment is applied once or twice because steel wire becomes hard by running it through a die. It is also plated with brass in order to improve adhesion to rubber. After repeatedly drawing the wire through the extruder die, the wire finally reaches the correct diameter. The important characteristics of steel cord are excellent tensile strength and a high modulus of elasticity. By modifying these characteristics, different cords are used in different tyres and different parts of the tyre. For passenger car tyres, steel cord is usually confined to the tread belt area, whilst in light truck and truck tyres it is also used to reinforce the carcass. In passenger car tyres the diameter of the filaments is smaller, improving the ride comfort and the durability of the belt. In addition the pitch of twist (turns per centimetre) is longer because durability is not as important in the belt area compared with the carcass. The most common weak point of steel cord is rust, caused by water penetration because of poor rubber penetration. If this process is carried out effectively there is no ingress for water and consequently no opportunity for the cords to fret against one another. Because of the importance of quality control in the manufacture of steel cord, many of the larger tyre companies produce some of their own supply, but the move now is towards buying it in from independent companies. By far the largest independent supplier is the Bekaert Group, headquartered in Belgium, but with a global manufacturing network in all the major regions.

36

Light Vehicle Tyres

As with other suppliers to the tyre industry, the major suppliers of steel cord are expanding capacity rapidly in Asia and rationalising production elsewhere. Bekaert SA, for example, aims to double its capacity for making steel cord in China by the end of 2005. The group said its strategy is to take 50% of the Chinese market for tyre cord, which it said has grown at 25% annually since 1997 and is continuing to grow at that pace. Over the next 3 to 4 years the market is expected to double again due to a combination of economic growth and a further radialisation of the tyres. The expansion programme will first involve expanding capacity at existing plants in Jiangyin and Shenyang to 80 to 90 kilotonnes per annum (ktpa) by the end of 2005. The steel maker has also started preparations for building a third plant in the north east of Shandong Province, with an initial capacity of 10 ktpa. China is not the only Asian market seeing investment in tyre cord. Bekaert has also inaugurated its first steel cord plant in Pune, India in early 2004. Initially, the plant has an annual steel cord production capacity of 5,000 tons, but this capacity could be expanded in line with the market growth. Bekaert is supplying most of the international and local tyre manufacturers in India with steel cord for the reinforcement of radial tyres. Similarly Sumitomo Electric Industries will double production at its subsidiary Sumitomo Electric Tochigi. Monthly production will increase from the current 2,400 tons to 4,800 tons in 2007.

4.2.5 Fibres A wide variety of fibres are used in tyres as reinforcement. In the early days this was mainly cotton but gradually newer materials were introduced. In the 1930s rayon was used and found to make the tyres stronger (or alternatively, make lighter tyres of the same strength). Nylon came in during the war and this was followed in the 1970s by polyester and later by aramid. As each new material arrived it did not necessarily drive out its predecessor but was used for specific purposes. Consequently, all of these materials are being used in tyre construction with a balance being drawn up weighing performance against cost but this equation is not static, it is constantly changing. Polyester has been making considerable inroads against rayon. Since about 1990, most tyre makers have increased their use of polyester reinforcement cord. Polyester is not as good as rayon, but it is far cheaper, less environmentally damaging, is more consistent from batch to batch and needs less careful handling. As a result, demand for rayon has remained steady, while demand for polyester has boomed. This change has taken place at the same time as the European tyre industry has made a marked switch away from low performance tyres to higher performance products. Some might even argue that the remarkable improvements in polyester cord in terms of strength and stiffness have allowed the tyre makers to increase the speed rating of their tyres. To summarise the alternative fibres and their properties: Cotton – Cheap, readily available and adheres easily to rubber without any pre treatment. However, it has poor impact resistance and is susceptible to chemicals. It is no longer used in automotive tyres but can be used in some bicycle tyres. Rayon – Good adhesion to rubber, low elongation, resistant to heat shrinkage and maintains uniformity in manufacturing and under the dynamic conditions of use. However, it is more expensive than other synthetics and not as resistant to wear. Nylon – Low specific gravity and high strength with excellent resistance to abrasion and fatigue. Against this, nylons are thermoplastic so heat shrinkage is a problem and they are responsible for flat-spotting when tyres are stationary for extended periods. Polyester – Relatively inexpensive and less susceptible to growth or deformation under normal service conditions. At the same time it is less suitable for heavier tyres because of its susceptibility to degradation and its higher hysteresis at elevated temperatures. Aramid – Superior in most physical properties but very expensive and only used in high value applications.

37

Light Vehicle Tyres

The next big leap in tyre manufacture is likely to be runflat tyres. These are designed to run hot – up to 160 or 170 °C so temperature has become the limiting factor in their life. Rayon can survive those temperatures but polyester cannot, so rayon could be making a comeback. Aramid has advantages over both these fibres but its cost is prohibitive for most usage. It is used extensively in racing tyres and to some extent in very high performance tyres. However, other areas are also increasing in importance. One notable example is the Michelin C3M system, which requires a single cap ply, and in many cases, this can only be achieved with aramid, or an aramid blend. One of the most active areas of research in the tyre reinforcement field at present is the use of a yarn comprised of one strand of aramid and a second strand either of polyester, or nylon or rayon. The combined yarn is almost as strong as pure aramid, but is significantly cheaper and offers a range of possibilities to the tyre designer, As reinforcing material, tyre-cord fabrics play a vital role in the quality of modern tyres. The tyrecord yarns are produced through a process of polymerisation, spinning and drawing. These yarns are then twisted and woven into raw tyre-cord fabric. Next, the fabric is dipped in an adhesive solution in order to bond it to rubber, and finally it is heat-treated to ensure dimensional stability. Research in polymer companies is concentrated on modifying existing polymers rather than trying to find new ones. The general aim is to try to optimise at least two of the three properties that are important to tyre companies – traction, rolling resistance and wear. This usually means trying to improve traction and rolling resistance without sacrificing the wear characteristics. There is scope to improve existing polymers so completely new polymers would be difficult to justify. There is a lot of capital investment in existing materials and processes. Despite this conservative approach several companies are actively investigating spider silk. Weight-for-weight and size-for-size it is far superior to any synthetic material so far developed. If it can be synthesised economically it could make big inroads into the market held by existing materials.

4.3 Current Manufacturing A tyre is a composite product of materials that have widely differing properties. The main subassemblies making up the tyre are: The Bead Bundle The bead is a loop of high-strength steel cable coated with rubber. It gives the tyre the strength it needs to stay seated on the wheel rim and to handle the forces applied by tyre mounting machines when the tyres are installed on rims. The Body The body is made up of several layers of different fabrics, called plies. The most common ply fabric is polyester cord. The cords in a radial tyre run perpendicular to the tread. Some older tyres used diagonal bias tyres, tyres in which the fabric ran at an angle to the tread. The plies are coated with rubber to help them bond with the other components and to seal in the air. A tyre's strength is often described by the number of plies it has. Most car tyres have two body plies. By comparison, large commercial jetliners often have tyres with 30 or more plies. The Belts In steel-belted radial tyres, belts made from steel are used to reinforce the area under the tread. These belts provide puncture resistance and help the tyre stay flat so that it makes the best contact with the road. Cap Plies Some tyres have cap plies, an extra layer or two of polyester fabric to help hold everything in place. These cap plies are not found on all tyres; they are mostly used on tyres with higher speed ratings to help all the components stay in place at high speeds.

38

Light Vehicle Tyres

The Sidewall The sidewall provides lateral stability for the tyre, protects the body plies and helps keep the air from escaping. It may contain additional components to increase the lateral stability. The Tread The tread is made from a mixture of many different kinds of natural and synthetic rubbers. The tread and the sidewalls are extruded and cut to length. The tread is just smooth rubber at this point; it does not have the tread patterns that give the tyre traction. Tyre Assembly The three main materials used in a tyre – polymers, fabric and steel reinforcement – follow separate routes in the preparatory stages of tyre manufacture. The polymers, various mixes of natural and synthetic rubbers, are mixed with fillers – carbon black or silica – and other chemicals to make the rubber component of the tyre. Different parts of the tyre will have different mixes used in order to achieve the appropriate properties. The mixing is carried out in a Banbury mixer which uses slowly revolving rotors to achieve a homogeneous mix. The various mixes are then extruded to a specific contour, forming treads, sidewalls and other components. They are cut to length as they emerge from the extruder. Textile fibres are twisted into cords, and these are then woven into a fabric with the cords running only lengthwise but held in place by crosswoven threads. The fabric is then impregnated with a special cement to improve adhesion with rubber before being passed through a multi-roll calender, where it is coated on both sides with rubber. The calendered fabric is then cut to certain widths and angles to be used as breaker and reinforcement in various parts of the body of the tyre. Rubber coatings are applied to the fabrics to facilitate adhesion and retention in the finished tyre. High tensile steel wire is used both for the bead – the rigid base of the tyre – and for the belt. The bead is coated with rubber and assembled into a ring-shaped bead which fits the rim of the wheel. At the same time the tyre cord passes through the wire treatment cutter to be cut to predetermined widths and angles before being assembled into the body of the tyre. The various subassemblies are then brought together for the building process. The individual components are pressed into shape sequentially by automatic rollers, giving a ‘green tyre’. After inspection, this is placed in a curing press, where the tyres get their final shape and tread pattern. The moulds are engraved with the tread pattern, the sidewall markings of the manufacturer and various identification markings required by law. Each press cures two tyres at a time, operating round the clock, seven days a week. Passenger tyres are cured at about 150 °C for between 12 and 25 minutes. This curing process changes the rubber permanently by vulcanising it, converting the ‘green tyre’ to a finished product. Once the mould opens, the tyres are placed on a conveyor and subjected to a final inspection. This includes both visual inspection and uniformity checks on a force variation machine. Tyres are also checked for balance and a sample are usually X-rayed. The entire process is multi-stage and highly labour intensive, involving building up the tyre carcass in layers manually on a drum. Each layer of material is often cut to length by hand before going off to be encased in its sidewall and tread components and then vulcanised. The introduction of automated processes has tended to be gradual and partial; evolutionary not revolutionary. Modern plants now have sequenced feeds and autocutting of materials to the building drum, but despite many incremental improvements, the whole process would still be recognisable to the manufacturers of the 1950s. Tyre manufacturing is part of the chemical industry but unlike most processes in the chemical industry, tyre manufacture is a discontinuous process. Whereas a chemical plant is virtually automatic and runs with minimal levels of manning, a tyre plant is much more labour intensive and requires several hundred people. Consequently tyre plants have to operate at utilisation factors

39

Light Vehicle Tyres

above 90% in order to be profitable. The need to keep these plants running at full capacity is the main reason why the market has always suffered from oversupply. This in turn leads to highly competitive pricing and inadequate financial returns for most companies in the industry. The firms in the industry have responded in two ways to overcome this disadvantage. They have worked to increase productivity and attempted to develop economies of scale. All companies have made enormous strides in this area over the last decade, and the industry as a whole has probably doubled its efficiency in the last ten years. Moreover, the pressure is still on and further gains are likely in the next five years. Companies have introduced automation wherever possible and moved towards three-shift, seven-day working wherever it was feasible. However, with all tyre suppliers achieving these gains, there is no comparative advantage – all the companies are doing is pushing down the aggregate cost base for the industry. The other way to become a low cost producer has been to build ever larger plants in order to maximise economies of scale. In particular, Goodyear and the two Korean companies, Kumho and Hankook, have built really large plants. Goodyear’s Lawton plant in Oklahoma (US) can produce 63,000 passenger tyres each day, and the Kelly-Springfield plant in North Carolina can produce 64,000. Hankook’s Daejon (South Korea) plant is of similar size, and its newly-built Kumsan (South Korea) plant has provisional plans to be even larger. 4.4 New Manufacturing Methods Economies of scale can give a competitive advantage to a company but the market itself has been changing and this is cancelling out these cost savings. Large-scale plants making enormous quantities of a very few types of tyre are ideal for the most popular tyres, but the market has been fragmenting, with both tyre sizes and types proliferating. Consequently a more flexible production method is needed, at least for part of the process. Even with the most popular sizes that can continue to be made in large-scale plants, the market is geographically broad, and if all production is concentrated on one location, the transport costs to end markets are substantially increased, offsetting much of the scale economies in the production process. At the same time, the efforts of the industry to lower its cost base has placed much more emphasis on just-in-time manufacturing and taking excess stocks out of the supply chain. Overall this can reduce costs dramatically but it does result in localised shortages of certain tyres at times when unexpected surges in demand or poor forecasting result in under-supply. Not only does this harm the reputation of a leading brand but it also means that the company loses the potential profit from maximising sales. The converse is also true. If a company can supply tyres at a time of localised market shortage it can expect to earn a premium, or at the very least higher margins, on the sales of this product. These factors have played just as large a part in the thinking behind new production methods as improvements in processing and production. All manufacturers have been looking at ways to reduce the inefficiencies in their production process and at the same time looked to serving the market demand more effectively. If small plants can be built near markets and they can produce tyres at much the same cost as large-scale plants, the economics and the structure of the industry will change radically. Michelin was the first to announce a new process but since then all the major manufacturers have claimed major advances in production methods. The key to any improvement in manufacturing is to make it more of a continuous process and to reduce the number of break points which destroy this continuity, eliminating as many of the steps involving semi-finished components as possible. Most of the new production methods reduce the amount of splicing required and they also try to use special weaving machines which are able to produce jointless carcass structures. Some also allow for the direct extrusion of treads and sidewalls onto the carcass and the injection moulding of circular parts such as beads.

40

Light Vehicle Tyres

All of these developments are shrouded in secrecy but they do seem to share certain attributes: they give the manufacturer much more flexibility, they promise considerable operational efficiencies and they require far less capital and space than conventional processes. However, whether they can combine both flexibility and low operating costs is not yet proven.

4.4.1 Michelin The first official news about a new manufacturing system came in 1990, and a prototype plant was built in 1993 but it was not till 1997 that the first plant opened outside France. The first tyres produced by this process were not very consistent, but within a few months the consistency improved dramatically and the process is now used for Michelin’s top of the range Pilot brand. The C3M process has become an integral part of Michelin’s manufacturing capabilities, with greater levels of quality and uniformity than its other more mature tyre manufacturing processes. One distinct feature of the process is its pinpoint accuracy for the placement of components during tyre manufacturing. In terms of quality and uniformity it has proved far superior to conventional manufacturing. The main advantages claimed for the process are: • • • • •

Capital costs about half of equivalent conventional plant. Labour required only one tenth of normal. Floor space required also one tenth of conventional systems. Stock turnover increased ten times. Lower energy consumption.

The key advantage of the C3M process is that tyre building is a single operation and curing is integrated into the process. The feed material is pre-extruded strip, supplied from central Michelin mixing plants. C3M units can be transferred from site to site easily and can be operational less than 24 hours after arriving at a plant. Michelin claims a 20-30% rise in productivity is possible with the new system. Every part of this new process of tyre manufacturing is radically different; from the initial mixing through to the final cure. The process is a flow-line system which makes components in their final form, and all conventional batch processes are eliminated. The reason that the plant takes up so little space compared with a normal process is that virtually no subcomponent manufacture is required. Each building machine is focused around a metal torus, which is fixed in size and proportion, so only tyres of a particular rim size and width can be built on that particular machine. However, this still allows variations in construction. Consequently this makes the individual machine somewhat inflexible, but as the machines are relatively cheap, a wider variety of them can be used, so the factory as a whole is very flexible. When a tyre of a different construction is needed, the machine is simply reprogrammed and the particular balance of ingredients fed into the extruder is altered. All the rubber parts are built directly on to the torus, and the bead wire is fed in as a continuous process from a drum, as are the belts. The C3M process allows Michelin to place precisely three different rubber compounds across the tread. Each of those compounds delivers a different kind of performance. The ply is knitted around the tyre in situ, passing around the bead wire to maintain structural integrity. This is probably the weak link in the process, as it takes the longest time. The torus is heated whilst building is taking place, and there is only a single heating/cooling cycle rather than many cycles in a conventional process. As the rubber is applied exactly where it is needed, less material is used and the tyre is lighter than a conventional equivalent. Belts, cords and Kevlar reinforcements can all be placed at performance-specific angles to control the shape of the tyre while it is in motion – a critical factor in performance, so the process is ideal for highperformance tyres.

41

Light Vehicle Tyres

The C3M unit is small enough and light enough to fit onto two aircraft pallets for transport. Consequently it can be shipped anywhere in the world at very short notice. Once it has arrived at its new location it can be operational within 24 hours as opposed to the 2 to 6 months for a conventional tyre building system. Typical production from a C3M unit is 5 or 6 tyres an hour, making 100-120 tyres a day, depending on the design. Consequently Michelin uses C3M mainly for strategic advantage and for high-quality precision manufacturing but there are other benefits. The logic behind C3M is to be flexible, portable and able to install quickly in strategic spots around the world – to serve the customer better.

4.4.2 Goodyear Michelin was the first company to announce and to put new manufacturing methods into operation but it was soon followed by the other major companies. Goodyear’s new process technology was announced in early 1998, and has been developed since. The term IMPACT is an acronym for Integrated Manufacturing Precision-Assembled Cellular Technology. It makes claims of very large savings in the production process, though perhaps not quite as dramatic as Michelin. • • • • • • •

Material costs reduced 15%. Labour costs reduced 35%. Energy costs are lowered significantly. In-process inventory cut in half. Curing time cut by 20%. Initial investment significantly reduced. Floor space significantly reduced.

In addition to this, it is claimed to be 43% more precise than the current industry capability, which improves ride, handling and treadwear, and it also reduces the weight of the tyre. As the cycle time is reduced by 70%, it increases productivity by 135%. Unlike the C3M process, Impact is a catchall name for a combination of new technologies applied to tyre manufacture. The system is still developing, but it has four main aspects that can be used all together, separately or in any combination. Even when all four elements are used together the system can be fully integrated with existing tyre-building processes. There are many technical advantages to this system. There is no need for elaborate control systems to match the various stations, and there is no change of shape of the profile as it progresses through the machine. The components are positioned very accurately with respect to each other, so design tolerances can be tightened and overall dimensions reduced. This results in lower total mass, shorter curing times and less waste. A third benefit is that the compound is not worked as much as in the conventional process because there are fewer extruders, so it retains its original properties. The use of these machines and systems has had a dramatic effect on productivity. In the pilot plants where IMPACT has been in operation the aggregate productivity index (tyres per hour across all employees) rose from 100 in 1998 to 125 in 2002. It has also resulted in substantial cost savings. Goodyear has taken a technically more conservative route than Michelin, but it still appears to be making dramatic improvements. The IMPACT developments are more a novel use of familiar technologies than something revolutionary. That is not to say that the process is less effective than other automated technologies, just a different way to achieve improvements.

4.4.3 Bridgestone Like all the big manufacturers, Bridgestone develops its own machinery in-house, and it has a high reputation for this aspect of its business. For some years it was rumoured to be developing an innovative manufacturing system but it was not announced until late 2002 when it revealed a complete manufacturing system. The new BIRD system (Bridgestone Innovative and Rational Development) is claimed to be the first to automate the whole tyre-making process from material

42

Light Vehicle Tyres

processing to final inspection. It is an integrated system comprising three key elements which can all be deployed separately. The three elements are: •

ATMSS (Automated Tire Manufacturing Synchronised System) automates and integrates the manufacturing processes from material processing through to vulcanisation.

•

AIMST (Automated Inspection Modular System Technology) inspects the finished tyres automatically.

•

FOA (Flow Oriented Approach) provides highly distributed autonomous information processing.

The BIRD system generates the materials needed to produce tyres during the production process. The production control centre sends instructions to the system to produce only the amounts necessary to complete production. In addition to doubling productivity, the BIRD system improves tyre quality compared to older systems. Tyre roundness is said to increase by 15%, the blend of tyre hardness rises by 30%, tyre weight balance jumps by 70%. Other advantages claimed for the system are that it permits great latitude in tyre design and it has the ability to produce multiple sizes of tyres simultaneously. This allows for smaller batch sizes and reduced inventories. It uses only 40% of the current energy used to manufacture a tyre and it minimises CO2 emissions. One BIRD unit can produce 200,000 to 350,000 tyres annually and occupies between one quarter and one third of the space of a conventional production layout. Bridgestone has tested the system in a pilot plant and is now launching production at its Tokyo plant during 2004. Plans call for the gradual implementation of the system at other Bridgestone manufacturing plants in the course of 2005. The technology will be used in markets where demand for ultra-high-performance tyres is high, though the group has yet to decide where and how to implement the system

4.4.4 Continental Continental has taken a somewhat different approach to the other multinationals. At its main factory it has introduced a fully automated system for producing long runs of standard tyres in basic sizes. This is not very flexible but the demand for these tyres can sustain continuous production. At the same time it has improved conventional tyre building equipment in order to speed up the building process and developed a fully automatic tyre-building machine called ESA, or single stage builder. This is reputedly capable of turning out a completed green tyre in less than 30 seconds, but it is believed to be extremely complicated as a machine. However, it is the main innovation that is the most radical. MMP or Modular Manufacturing Process was developed in response to a situation that is common to all tyre companies – an uneven demand pattern. Only about 400 of Continental’s more than 2000 passenger tyres offer a substantial volume. The remaining 1,600 have comparatively low annual demand. Production of these relatively small volumes is spread over the year and involves expensive machine changes and tyre stocking. The introduction of new tyre sizes and types means that the market is getting even more fragmented and adding to the problem. MMP is designed to make the manufacturing process more flexible by making use of large-scale production capacities to manufacture what the company calls the ‘tyre platform’, the blank casing. This platform is partially cured before being shipped out to the specialised MMP satellite for final assembly. Here the individual tyre distinguishing elements – the tread, the sidewall and the belt package – are added and final curing takes place. A dedicated MMP finishing plant or ‘minifactory’ is designed to operate viably at volumes as low as 500,000 tyres a year and is flexible enough to accommodate runs as small as 100. This is not a substitute for existing manufacture, but a supplement to it. Continental believes that its MMP system matches or exceeds C3M and MIRS (Pirelli) in quality, productivity and cost. It is using its modular system at plants in Austria and Germany and at the

43

Light Vehicle Tyres

San Fernando, Argentina, plant of its technical affiliate, FATE S.A.I.C.I. In addition the new plant at Timosoara, Romania, and other new plants are designed around the system. The company estimates that 15% of all passenger tyres were produced in MMP plants in 2003.

4.4.5 Pirelli Pirelli has developed a roboticised system for making tyres and has now linked that to a unique process for the production of compounds. The MIRS concept – Modular Integrated Roboticised System – came on stream at an experimental level in late 1998 and ¼P KDV VLQFH EHHQ LQYHVWHG in various European plants to install the system. The process starts with a pre-production phase where four machines make thin calendered reinforcement strips which will eventually be cut to precise lengths and used to make the reinforcing elements. Each machine has a creel containing bobbins of prepared wire or twisted and dipped yarn that feeds into the extruder. The second main production step is the robotic building area. Each tyre is built around a rigid aluminium toroidal drum made up of eight segments. The robot then presents the drum to an extruder and applies the first layer, in this case the inner liner, before moving to a second extruder for application of the under liner. The part-finished tyre, still on its former, is then passed from robot to robot, each adding two or three more component layers. When the robot arms have built up a complete tyre the green tyre is then placed in a curing press by more robot arms. The full tyre production cycle is carried out entirely by robots without interruption. Among the advantages of the system is that semi-manufactured components do not have to be moved so no intermediate storage is required and there is no waste of energy. The MIRS can make a new tyre every three minutes. The CCM (Continuous Compound Mixing) system was added in 2002. It is claimed that this is able to ensure quantitative control of materials with an unprecedented level of precision. The computerised management of the feed flows permits a total control of up to 40 ingredients together with chemical reactions, temperatures and mixing conditions. As a result, the lead time, which is about 24 hours in the traditional mixing process, is greatly reduced to 4.7 hours, energy consumption is lowered by over 20% and the variability of the physical properties of the compound is 70% lower.

4.4.6 Other Developments As well as the global manufacturers, other tyre companies have also been developing improvements in production. Sumitomo Rubber Industries Limited has unveiled its new tyre production system, which is already in operation at its Shirakawa plant in Fukushima, Japan. Called ‘Taiyo’ – Japanese for sun – the system ‘integrates tyre production processes from component preparation to tyre curing in one compact cell. Among the claims Sumitomo makes for Taiyo are: • • • • •

A 5% reduction in tyre weight due to tighter tolerances on rubber thickness. A more rigid casing due in part to the use of micro fibres compounded into the sidewall rubber. Greater flexibility in design and production. Enhanced investment efficiency, in that a Taiyo cell can produce 1,000 tyres of eight different sizes a day. Improved operating efficiencies from a smaller plant size, reduced intermediate inventories and a 35% drop in energy consumption.

Kumho, the Korean manufacturer is incorporating a modular system in its new factory that is being built at Pyongtaek, close to some major car assembly plants. Known as APU (Advanced Processing Unit), the modular system was fully installed in early 2004. The new factory can produce 6,000 tyres per day, with annual production capacity expected at 2 million. The basic principle of APU is

44

Light Vehicle Tyres

to minimise up-stream component production and storage and move to a just-in-time or on-demand supply of tyre components at the building station. APU combines up to nine tyre-making steps – calendering, extrusion, tyre building and more – into an integrated system that reduces the length of the tyre production line by a third, to about 790 m. Most developments by the global companies involve them designing and making their own machinery but the independent machinery makers are developing their own systems, often in collaboration with some of the medium-sized tyre manufacturers such as Cooper. VMI and Berstorff GmbH have been collaborating for the past five years on automation, mating Berstorff’s tread extruders with VMI’s tyre builders. A machine undergoing trials at Cooper-Avon is the first practical test of this technology. Assogomma, the Italian rubber industry association, is at the centre of a loose consortium of mainly Italian machinery companies examining continuous mixing. This technology has been used in mixing plastics compounds for at least 50 years, but has only recently attracted significant interest from the rubber sector. However, perhaps the most unexpected entrant into the field of new manufacturing techniques is Toyota, the vehicle manufacturer. Toyota has co-developed a new tyre-making technology with Fuji Seiko, a manufacturer of industrial equipment. The company has been deliberately vague about the technical details, but the tyre is built to its final, fully inflated shape by assembling it around a core, and only then is it sent through the curing process. Like other new manufacturing processes, Fuji Seiko claims considerable savings – cost reductions of 20% and space savings of 80%. Moreover the tyre itself is claimed to be considerably lighter than a unit made on existing manufacturing equipment. Both Yokohama and Toyo have agreed to manufacture tyres using this equipment and both started production in late 2002 but neither has adopted this for large-scale production – it is still in development. It is generally believed that this is an experiment by Toyota rather than a serious attempt to manufacture tyres on a large scale. The company’s main objective is probably to gain first-hand knowledge about tyre-making costs, giving it more strength in its negotiations with companies such as Bridgestone or Michelin. 4.5 The Future for Manufacturing For many years there has been little change in the manufacturing process apart from incremental improvements in productivity but the last decade has seen some dramatic innovations. All of the big global companies now have new manufacturing systems though they are only installing them gradually, partly because they are still being developed and partly because they are better at some types of production than others. They differ in their details quite considerably but all are different approaches to the same problems. They all claim dramatic savings in space, capital cost and labour input but they also lend themselves to the production of a much more precise end-product. They are much better in terms of the precision placing of components within the tyre. With the greater understanding of the physics involved in tyre dynamics this is critical in order to develop products to take advantage of the changing nature of the market. It is not possible to compare one system with another in any detail but it is no coincidence that the new developments have come mainly from the dominant firms in the industry. These are the companies that have the resources to develop new processes, and it is very much to their advantage to do so, as it means widening the production gap between themselves and smaller competitors. Large plants are still needed for the efficient manufacture of high volume tyres. At the same time the market is changing and there are fewer really large volume lines. Where the large firms are likely to take advantage of the new processes, though, is in building small flexible plants for specific markets or for specific customers such as the vehicle manufacturers. Whichever route they take, it would appear that production advantages are beginning to swing back to the large established companies rather than the aggressive newcomers.

45

Light Vehicle Tyres

46

Light Vehicle Tyres

5 Marketing 5.1 Introduction Michelin’s ‘Bibendum’ is one of the most recognised brand symbols in the world and other tyre manufacturers such as Goodyear with its ‘Wingfoot’ symbol also enjoy high recognition. Yet, despite this high visibility, tyre company marketing has been characterised more by commodity sales than by sophisticated campaigns and the margins of the companies involved reflect this. This situation is now beginning to change, though very slowly. About 30% of passenger car tyres are sold to original equipment manufacturers, and these buyers are extremely sophisticated. The tyre brand means little to them (though it does have some influence in their choice of tyres, particularly for prestige or high performance vehicles). Their main consideration is obtaining the right tyre for the specific vehicle in order to enhance and maximise the engineering objectives for that vehicle. Thus a sports version of, say, a Volkswagen Passat will have different tyres than a middle-of-the-road saloon version as it has different suspension, acceleration and grip requirements. The other main consideration for OEM buyers is price but this only comes after the engineering specification. Traditionally the tyre manufacturers have sold their tyres at cost price or even at a loss to the OEMs because of the prestige of being an original fitment and in the hope of obtaining replacement purchases but they are beginning to be much more sceptical of these unquantified advantages and are demanding higher prices, commensurate with the R&D effort that is put into many of these products for new vehicles. Michelin led the way in Europe some years ago, by walking away from some business when they were offered uneconomic prices and other suppliers have also toughened their attitude. In turn the OEMs are sourcing their tyres from a wider range of suppliers although they still look to the major producers for innovative engineering solutions. The two Korean manufacturers, Kumho and Hankook, are now obtaining OE contracts in Europe and North America, as well as in their native Korea and Yokohama and Toyo are also used on a number of vehicles. The other 70% of passenger car tyres are an aftermarket product, replacing worn tyres, and it is here that the tyre companies are attempting to get rid of their commodity reputation. The effort is being made across a wide front, starting with distribution and covering branding, market segmentation, and a variety of high margin niche markets (though the hope is that they will develop into sizeable market segments). 5.2 Distribution

5.2.1 Wholesaling In most of the developed markets distribution is a two-tier operation with both wholesalers and retailers servicing the market but it is rather more complicated than this simple description implies. In Europe wholesalers supply a national market but rarely cross borders. They supply in bulk largely to the independent retailers as the chains have their own supply lines, but because retailing demands very quick deliveries of specific brands or sizes they also supply local branches of chains with their daily non-stock requirements. Some wholesalers are owned by the major manufacturers but they operate at arm’s length from their parent as they need to stock all major makes of tyre for their customers. However, a number of the independent companies act as the importers and exclusive suppliers of brands from small manufacturers in Asia, particularly China, Taiwan and India. In North America, because of the sheer size of the USA and Canada, wholesalers tend to operate regionally rather than nationally, covering several states with their delivery service. The only national companies are private brand suppliers which are not strictly wholesalers as they do not carry a wide range of popular brands. They concentrate on their own private brands, controlling the rights to their labels and restricting distribution to maintain exclusivity. For example, TBC, based in Memphis, Tennessee, derives the bulk of its wholesale business from the sale of its Cordovan,

47

Light Vehicle Tyres

Multi-Mile and Sigma private labels. However, it also acts as the distributor for the Fulda imported brand. Japan is a much more compact market and is much more closely tied into networks of business relationships, so far more of the retail outlets offer only a limited range of brands. As a result the wholesale companies work very closely with a single manufacturer such as Bridgestone or Yokohama and supply only tyres approved by that manufacturer. Despite these structural differences, wholesalers worldwide are all facing the same pressures. Tyre size proliferation, the reduction in ‘safety stock’ by the tyre manufacturers, and the need for greater forecasting by distributors and retailers alike have changed the face of inventory management for wholesalers. Because manufacturers are sourcing globally, the lead time in getting its tyres can be doubled. Sizes within the same style might be produced in several different factories, located in different countries around the world. As a result, manufacturers cannot respond as quickly to inventory shortages or spike demands. This puts much more emphasis on the wholesalers and their role is growing in importance. So too are their responsibilities.

5.2.2 Retailing Retailing is carried out by a wide range of businesses ranging from petrol service stations to large chains of specialist tyre fitters. In most developed economies independent tyre fitters operating a two or three bay centre comprise the majority of outlets and the non-specialist outlets are in decline. The major tyre companies regarded these specialist outlets as important marketing channels and built up extensive chains in various countries but the nature of the market prevented them from selling their own brands exclusively; they had to be able to offer competitor’s brands in order to remain competitive. For example, in the UK until recently Michelin, Goodyear, Continental, Sumitomo and Pirelli all had their own ‘equity chains’ but none of them operated under the name of their parent company. At the core of these chains was wholly-owned outlets but several of them expanded their coverage by extending the operation to independent operators under a franchise. These chains certainly helped the companies to maintain their market share but the business was very competitive and most found it extremely difficult to make a profit. With a new sense of realism, some companies such as Continental have sold off their retail business completely whilst others such as Goodyear are cutting back on the size of their operation. Companies which were late into the field such as Bridgestone in Europe, have not attempted to buy or build up equity chains but have taken the alternative route of establishing a soft franchise network under the name First Stop. The one exception to this appears to be Michelin which has gradually brought its various operations in Europe under the ‘Euromaster’ banner and has now bought the Danish Viborg chain with 465 branches throughout Germany, Austria, Denmark, Switzerland and the Netherlands. Added to the 1200 strong Euromaster chain, the combined Euromaster-Viborg network now has a share of about 13% of the European truck tyre replacement market and 8% for passenger tyres, according to Michelin. Michelin’s strategy is more concerned with providing a Europe-wide service to targeted groups of users than a crude increase in its market share. It uses these outlets to service contracts with large trucking fleets and, to an increasing extent, with car leasing operations and other large fleets of passenger cars. However, it is now building on that base and offering added value services such as its OnWay scheme. This scheme, which has now been extended from France to Germany and Austria, acts as a free insurance service to motorists who buy Michelin-brand tyres. Included in the cost of the tyre is an insurance premium, which covers the motorist against tyre damage – either accidental or malicious – or theft. The service lasts two years from the date of purchase, and guarantees a one-hour response time. Motorists have to register their tyres, either on-line or using a brochure supplied with the tyre. Once registered, the motorist is given a card with a contact number, and in the event

48

Light Vehicle Tyres

of damage or theft, calls the number. The contact number is a reduced-rate service and is available 24 hours a day, every day of the year. If the tyre can be repaired then the motorist pays nothing, but if a part-worn tyre has to be replaced, following damage, then the motorist shares the cost, paying pro rata for the amount of treadwear. If the car has a serviceable spare tyre, then the service will swap tyres at no charge to the motorist. The tyre companies have not been the only people building up fast-fit chains. Sears-Roebuck in the USA built up a nationwide chain but found it difficult to make consistent profits. After much effort it has now sold its 225 National Tire & Battery outlets to TBC. This company now has almost 1200 outlets across North America, 590 Tire Kingdom and 570 Big O service centres. Other mass merchandisers remain in the business, however, the largest being Wal-Mart with its Sam’s Club and Tire & Lube Express Centers. Many successful independent operators have extended their business plan into chains of various sizes but most have sold out at some stage to larger operators. In North America several companies have more than 1000 outlets and although no company has an even spread of representation, TBC, Discount Tire, Les Schwab and Pep Boys can all be considered national chains. In Europe only Kwik-Fit approaches this size. Originally a UK company, it was purchased by Ford but is now once again independent with outlets across several countries in northern Europe. The variety of outlets is demonstrated in Table 5.1 showing the proportion of tyres sold in North America by the various types of dealer. Table 5.1 Retail sales of tyres by type of outlet 2003 Car tyres Light truck tyres Local dealerships 44% 52% National dealerships 19% 21% General merchandise distributers 19% 10% Tyre makers outlets 10% 8% Regional dealerships 3% 6% Other 5% 3% Source: Tire Business Local dealerships are those with less than ten outlets but in total they command the bulk of the market as Goodyear has recently found to its cost. One of the main reasons for that company’s poor financial performance and loss of market share in North America has been because it upset its independent dealers. They felt that they were being used unfairly by the manufacturer and turned to other suppliers. They are not unrealistic and accepted that a major manufacturer must supply all market channels but they felt they were being treated unfairly. Nevertheless it is possible to run with the hare and chase with the hounds as Bridgestone/Firestone has proved. It has about 1500 outlets but when it agreed to supply Midas, a servicing chain, with Firestone tyres the agreement was that they were to be supplied through local Firestone dealers, thus keeping potential arguments at bay. All tyre retailing is having to move with the times and the internet is attracting a great deal of attention but its potential has not yet been realised.

5.2.3 E-Commerce A study by J.D. Power in 2003 regarding the motorist’s use of the Web was based on responses from about 7,900 vehicle owners in the US who had bought replacement tyres for their vehicles shortly before the survey was conducted. The satisfaction study found that more than 60% of tyre buyers access the Internet, but only 16% of them use it when they need to buy tyres. However, all the major manufacturers have developed extensive web pages designed to give full information about the complete product offering. Whether or not these will be used by potential

49

Light Vehicle Tyres

buyers is another question. One of the most interesting approaches has been made by Michelin in North America with its Tire Advisor web site. After entering Tire Advisor, the screens are selfinstructive. Consumers are asked to enter their vehicle year, make, model and options. They are then asked one to five questions concerning their driving habits and driving priorities. Based on these responses, they are given a list of tyre lines that meet their criteria. This list also contains information on test results so that consumers can compare different tyre brand lines and make informed decisions about their tyre needs. Ratings are given on a one-to five-star basis, with five being the best. What makes the Tire Advisor unique is the comparison across a variety of brands – not just the Michelin, BFGoodrich and Uniroyal brands. Other national brands compared in Tire Advisor include Bridgestone, Cooper, Dunlop, Firestone, Goodyear, Pirelli, Yokohama and a small percentage of other brands. This type of independent approach has much to recommend it though whether it will be used by customers is too early to judge. Some new businesses have grown up with the Internet at the core of their business plan. For example, Black Circles in the UK is using the Internet as a tool to market tyres in what is a unique route to market. Whilst most tyre purchases remain distress purchases, Black Circles concentrates on the growing sector of the market where planned replacement of tyres is the norm. This usually means sales of ultra-high performance (UHP) and higher margin tyres. This rapidly growing Internet and mail order tyre operation carries very little stock and has no inhouse retail outlets or warehouses to speak of. People call or use the Internet to request information, obtain a quote, and book a fitting for their tyres. This is then arranged with one of the fitting outlets that have joined the network. Black Circles takes on the cost to sell tyres and pays its fitter partners in advance. In the process it claims to offer everyone a better deal from the client buying the tyre, to the retailer getting paid in advance and taking a greater margin. Even the UK tyre wholesalers and manufacturers are content as Black Circles has a policy of supporting local suppliers who can offer them repeated standards of high service. It is likely that a lot of the chains, both manufacturer owned and independent, will start to follow this approach and eventually it will be emulated by the smaller independents but this does depend on educating the customer to pay more attention to their tyres. At present it is mainly a distress purchase and it will be a long and difficult path to wean the majority of customers away from this attitude. Hence the effort that all manufacturers are putting into branding. 5.3 Branding The development of standardised marketing in global corporations has emerged only recently in the tyre industry. Marketing in the industry is not new – Michelin brought out its Guides in 1901 as a promotional aid to encourage people to travel more – but until the 1980s even the largest companies were essentially regional. Even if they operated in several regions the marketing policy was not set centrally; it spread out from the centre but was modified or altered to suit local conditions. The corporate mergers of the 1980s changed this situation dramatically as several companies found themselves with worldwide interests, often in conflict with each other. For example, Bridgestone, having taken over its old mentor Firestone, found itself with competing brands in several regions. The challenge was to position these brands in order to maximise sales. Just as important, because of the increasing contact between regions, the brands had to be consistent across regions. All the other major tyre suppliers faced similar problems, though not perhaps in quite such an extreme form. In broad terms most developed markets can be divided into four categories: • •

50

Brand conscious Value customer

Light Vehicle Tyres

• •

Store reliant Price conscious.

Each of these categories takes about one-quarter of the market, although the proportions do change somewhat over time and between different market areas. The brand conscious customer is knowledgeable, interested and prepared to pay a premium price for the product that will suit his or her requirements. The value customer is still prepared to pay more than average and these requirements are less exacting, but he or she wants the reassurance of a good name. Store-reliant customers know little about the subject, and they put their faith in the retail outlet they use to select a good product for them, whilst price conscious customers will search out the lowest price with no loyalty to either brand or store. These perceived categories have implications for branding, and most manufacturers are developing brand portfolios to address these – the premium brand for brand conscious customers, secondary brand for value conscious motorists, fighting brand(s) for the price conscious market and private brands for store-reliant customers. In order to clarify their brand structure most manufacturers have concentrated their efforts on three main brands but because they have only recently become true multinationals they have had considerable difficulty even achieving this simple brand structure. They have chosen a ‘good, better, best’ formula and the global companies are now trying to establish these brands on a worldwide basis. Manufacturer Michelin Bridgestone Goodyear Continental

Table 5.2 Brand position of major manufacturers Good Better Best Kléber B F Goodrich Michelin Dayton Firestone Bridgestone Kelly Dunlop Goodyear Barum Uniroyal Continental

However, it can be seen that even this simple classification gives many of the manufacturers major problems. Although the Michelin brand is recognised worldwide, the Goodrich brand is mainly known in North America and Kléber is only strong in France although it is growing elsewhere in Europe. Bridgestone had considerable problems when it took over Firestone as the Firestone brand was far stronger in the USA than the parent brand, Bridgestone. For some years Bridgestone tried to get the Bridgestone brand accepted by the OEMs but with limited success and then the disastrous recall of Firestone tyres in 2000 forced it to rethink its strategy. The bad publicity resulted in a major loss of market share for Firestone and at one stage Bridgestone even considered dropping the brand altogether. However, it persevered and Firestone has now made up for most of its losses but there is no doubt that it is not as strong as it was. Bridgestone meanwhile has made considerable progress with OEMs and is gradually building a position in the replacement market but it will be a long slow change. The Dayton brand has no recognition outside the USA so the company needs to develop a credible third brand. Goodyear probably has the most widely recognised three-brand structure. Goodyear itself has a high recognition factor worldwide and, since its alliance with Sumitomo, it now has another widely recognised brand, Dunlop. Its third main brand, Kelly, is well-known in the USA but hardly recognised elsewhere so the company still has a lot of work to do. Continental is much smaller than the big three manufacturers but it has a plethora of brands to choose from, thanks to acquisitions. Its premium brand is Continental but it has much more of a problem with its secondary brand. Almost all of the brands it has acquired are little-known regional brands. The obvious choice would seem to be General, the company it bought in the USA in 1987

51

Light Vehicle Tyres

but that brand never had a good reputation, even in its home market. The name itself lacks any real identity and is not one to inspire much loyalty. Continental has now accepted this and is substituting the Continental brand for General throughout North America. However that leaves the company with the problem of what to use as its second brand. It appears to have chosen Uniroyal but that has considerable disadvantages. It first licensed the Uniroyal name from UniroyalGoodrich in the 1980s for use throughout Europe. However, when that company was taken over by Michelin it found that its French rival now owned the name. In the event Michelin has agreed to the continued use of the name by Continental but only in Europe – it cannot use it elsewhere. This puts considerable restraints on its brand strategy and cannot be regarded as a satisfactory long-term solution. However, it has had considerable success in developing its Barum brand as a value-formoney product. This simple three tier brand structure favoured by the manufacturers is proving difficult and expensive to implement because of the previous fragmentation of the industry and the conservatism of the customers. In any case the market itself is now fragmenting much more and some of the bigger firms are adopting a much more sophisticated strategy. Michelin, for example, argues that other emotions also affect purchase decisions, not just quality and price and it places its brand names on a four-axis grid. The top/bottom axis shows QUALITY and PRICE (though Michelin does not use the word quality in this context as it would imply that some tyres were not of the same quality as others). The side/side axis shows the emotional response to a tyre with gradations from PASSION to REASON. The Michelin brand itself is placed at the top for brand reputation, i.e., quality but with a neutral position between passion and reason. Goodrich, however, is regarded as a tyre for the passionate buyer though still priced above average. The company’s lesser known and regional brands are below average in pricing terms but can still appeal either to the passionate or the reasonable buyer. Table 5.3 Michelin’s view of its own brand positioning BRAND Michelin Kleber

BFGoodrich Uniroyal

REASON

PASSION Taurus Riken P&A Brands

Kormoran

Siamtyre Icollantas PRICE Source: Michelin This is a much more precise method of brand management and it helps in the planning of strategy for the new niche markets that are appearing. However, it is expensive to develop any brand properly and the more brands there are, the more the total cost. The smaller companies have already acknowledged this and concentrate their efforts on one or two brands but the larger companies may have to recognise this as well.

52

Light Vehicle Tyres

5.5 Market Niches Every manufacturer seeks out market niches – areas of the market where it can establish a special position. These always start small but they can grow to quite a sizeable proportion of the market and they often grow much faster than the overall market. However, the key characteristic of these niches is that they usually command higher margins, both for the manufacturer and for the retailer. Some niches are small and will remain small but they can still give good returns to the specialist dealer. For example all-terrain vehicles (ATVs) require special tyres and these vehicles are becoming more popular though the demand is not large enough for the tyres to be stocked by the average dealer. Similarly, recreational vehicles (RVs) are a mature though significant market, particularly in North America, and these too require special tyres only made and stocked by a minority of companies. However, the most important market niches are not servicing specialty vehicles but are part of the normal passenger car tyre market. Three segments of the passenger car tyre market are particularly buoyant at present, showing rates of growth which far outstrip the market average. Consequently most manufacturers are concentrating a lot of their activity on these three sectors – ultra-high performance tyres, SUV tyres and winter tyres. Table 5.4 shows that these segments are forecast to grow at much higher rates than the industry average of 2-3% Table 5.4 Worldwide growth in dynamic sectors 2002-2005 (Index 2002 = 100) Segment 2002 2003 2004* UHP tyres 100 111 119 SUV tyres 100 104 112 Winter tyres 100 104 107 * Note: 2004 and 2005 are forecasts Source: Michelin

2005* 140 118 111

At one stage SUV tyres were considered to be specialty tyres for specialty vehicles but this design is now so prevalent it is considered part of the passenger car market; indeed in North America SUVs now almost outsell conventional cars. High performance and ultra-high performance (UHP) tyres used to be limited to a very small segment of the market but as cars have improved in performance and specification these tyres are now commanding an ever larger share of the market. Winter tyres are another niche, this time confined to more northerly climates but they are not necessarily for snow and ice; they are designed for better control of a vehicle in low temperatures and wet and dirty conditions so they have established markets in some temperate northern climes such as the Netherlands. Finally, the so-called ‘tuner’ market is driven by fashion but this market often introduces styles and designs which later find a wider market.

5.5.1 High Performance Tyres The high and ultra-high performance tyre sector is the cutting edge for manufacturers to promote their flagship products. Such tyres used to be for sports cars or the more exotic marques where performance is everything. This trend has however now changed, with luxury cars demanding UHP tyres which both perform and which are comfortable. Until recently OE sales of UHP tyres outnumbered replacement market sales, but the balance is reported to be shifting, and it is forecast that by the middle of the decade, the roles will be reversed. Vehicle characteristics are continually evolving. New vehicles coming from OE manufacturers are being required to do different things than they have in the past, including perform at different levels in terms of handling, cornering capabilities and braking. Performance tyres are part of that mix of chassis performance. The high performance sector of the tyre market is attracting a lot of attention from manufacturers, partly because it is growing rapidly and partly because it offers the opportunity of high margins in

53

Light Vehicle Tyres

what is increasingly a commodity business. In Europe especially, but also in North America, there has been a surge in demand for high performance tyres – V-, W- and Z-rated tyres. Midperformance (H-rated) tyres have demonstrated a static demand in Europe but are growing strongly in America, and in both regions sales of low performance tyres (S- and T-rated) have declined substantially. Unfortunately the market suffers from conflicting definitions of high performance. Europe is the definitive market for these tyres as it was here that the development first occurred with OEMs requiring better tyres for the high performance cars produced and it is in Europe that the performance of these tyres really comes into its own. A significant proportion of car buyers drive their vehicles to the limit on winding and tortuous roads as well as on motorways. America tends to have a very different style of driving with long straight roads and speed limits that are generally lower than in Europe. Consequently the market for true high performance tyres is more advanced in Europe than America. In Europe high performance tyres are limited to V-, W- and Z- rated tyres whilst American figures usually include H-rated tyres in this category as well – a tyre that would be regarded as mid-performance in Europe. Indeed the performance tyre market, as it is defined in North America, is even broader than that. Many tyres lumped into the performance category are merely ‘cosmetic’ or performance in appearance only. Some companies include such tyres in the data they supply for the industry wide tally and other companies do not – an inconsistency in reporting that increases the difficulty of quantifying the performance tyre market as a whole. In North America in 2003 manufacturers’ sales of H, V, Z and Y speed-rated tyres enjoyed doubledigit increases, according to industry figures. If sustained, such growth would exceed the 8.5% annual increase over the next five years forecast by the Tire Market Analysis Committee of the Rubber Manufacturers Association (RMA). Shipments of performance tyres as a whole, including non-speed-rated tyres, are expected to increase at a more modest 3.3% annual rate during the next five years. Yet this too would surpass the 1.5 to 2.3% annual growth anticipated for replacement passenger tyre shipments as a whole. As a group, performance tyres last year accounted for about a third (32%) of the 198.9 million replacement passenger units shipped in the US. Of the 63.6 million replacement tyres shipped to the performance sector, the ultra-high-performance tier accounted for about 34.7%. In Europe high performance tyres will increase from a market share of 18% in 2000 to a forecast share of 31% in 2005. In what is a largely static replacement market that represents significant growth so it is little wonder that all major manufacturers are paying a lot of attention to this segment. The proportions vary quite markedly from country to country. In Switzerland and Germany in 2000 HP tyres represented over one third of the market whereas in France they only accounted for 8%. However, the growth in France is likely to be much faster with HP tyres accounting for 26% of the market by 2005 whilst in Germany it will have grown to 42% and in Switzerland 45%. Overall, the high performance sector (including H-rated tyres) is forecast to grow by more than 50% between 2002 and 2008.

Europe Asia North America World Source: Michelin

54

Table 5.5 Forecast growth for performance tyres 2002-2008 2002 2008 m. units % m. units 138 57 209 56 23 80 48 20 91 242 100 380

% 55 21 24 100

Light Vehicle Tyres

5.5.2 SUV Tyres The sports utility vehicle has been a phenomenon of the car industry throughout the last decade. Although vehicles of this type of specification have been available for more than fifty years it is only recently that they have really taken off. At first they were the equivalent of luxury versions of the ubiquitous Jeep and Landrover – vehicles such as the Rangerover and the Mitsubishi Shogun – but as more and more customers were attracted to the capabilities and the high driving position of these vehicles a plethora of variations were introduced. At first they claimed to have an off-road capability but now most only give a token nod to this part of the specification and concentrate on comfortable on-road driving. The implications for the tyre industry are that these vehicles are bigger and heavier than most passenger cars and they therefore require a light truck tyre in size and construction. However, they also demand more comfort than a light truck tyre would normally give so new designs have been developed. The market for these tyres has grown as rapidly as the market for SUVs and, until recently has shown little sign of slowing down. The North American market leads the rest of the world in the demand for these tyres as it is this region which has shown the strongest demand for SUVs. They are also gaining market share in both Europe and Asia but they have not displaced conventional passenger cars to nearly the same extent as in North America.

North America Asia Europe World Source: Michelin

Table 5.6 Forecast growth for SUV tyres 2002-2008 2002 2008 m. units % m. units 81 71 106 24 21 28 9 8 15 114 100 149

% 71 19 10 100

Overall this represents a growth rate of 4.5% per year; still high compared with the general market growth but well down on the dramatic growth rates of the 1990s when it was growing from a much smaller base. However, it is still producing very satisfactory gains as the latest quarterly estimates for the west European market show. According to figures released by SNCP, the French polymer industry trade association, SUV replacement tyre sales in the EU plus Norway and Switzerland grew by 12.2% in the first quarter of 2004 compared with the corresponding quarter in 2003. Growth is set to continue in the short term but rising oil prices cast a cloud over the medium and longer term prospects for SUVs (and hence SUV tyres). These vehicles are larger and heavier than passenger cars and they use much more fuel. If oil prices remain at current levels or rise further it is likely that prospective buyers will choose economical passenger cars rather than thirsty SUVs.

5.5.3 Winter Tyres The original name for winter tyres was snow tyres but this was a misnomer and has hindered sales. The industry now refers to these tyres as winter tyres. Thirty years ago many motorists in northern Europe and northern North America. used a set of snow tyres on their vehicles. But thanks to the proliferation of all-season tyres over the years – and the popularity of front-wheel-drive vehicles – dedicated snow tyres gradually lost their grip on the market. Consumers came to believe that all-season tyres were enough to pull their cars and trucks through snow and ice. Winter tyres are designed to deal with temperature conditions that adversely affect the performance of summer tyres. A summer tyre is manufactured with the function of keeping the tyre in contact with the road surface in both wet and dry conditions. The. compounds of which it is made have a

55

Light Vehicle Tyres

specific level of adhesion designed in. The chemical make up creates an interaction between the tyre and the roadway. However, the compound utilises an oil in the mixing process that allows the various components in the compound to blend and mix and work together as one. This polymeric oil can, and does migrate in time, leading to the deterioration of the tyre. In practice it migrates inwards in cold climates towards the lining of the tyre, thus degrading the tyre tread, hardening it and making it less effective in its interaction with the road surface. The point at which it does this is around 7 to 8 °C. So, the efficiency of summer tyres in the wet or dry in winter is diminished. Even without snow and ice, a winter tyre becomes a safer option in colder weather as shown in Table 5.7. Table 5.7 Performance comparison of summer and winter tyres Braking distance from 100 kph to rest Dry roads Winter tyres Summer tyres 20 °C 46 m 41 m 5 °C 41.5 m 39.5 m Wet roads 20 °C 67 m 65.3 m 5 °C 65.7 m 70.5 m In this test by an independent testing organisation in Germany the summer tyres outperformed the winter tyres in both wet and dry conditions when the temperature was at 20 °C. However, when the temperature fell to 5 °C the performance of the summer tyre fell off markedly; much more than the winter tyre. Although it still retained an edge over the winter tyre on dry roads it performed much worse on wet roads. The conclusion is that when it is cold and wet, but not necessarily icy, winter tyres perform better. Because of the move towards all-season tyres many of the bigger manufacturers lost interest in this market and concentrated on improving their compounds but others persisted, most notably Nokian of Finland and Continental. They proved that there was a consistent market and gradually other tyre manufacturers once again took an interest in this segment. Several years ago, tyre makers began to promote dedicated winter tyres again. Existing products were updated, new ones were rolled out and advertising campaigns were deployed. At the same time drivers were being made more aware of the safety aspects of winter tyres by the promotions and incentives offered by insurance companies. Similarly a number of independent media and consumer reports began looking at the attributes of these tyres.

Europe Asia North America World Source: Michelin

Table 5.8 Regional market for winter tyres 2002 m. units 56 15 7 78

% 72 19 9 100

The market has built up gradually but it is an erratic market and very seasonal. 80% of sales are made in the second half of the year and demand can be very fickle. If snow comes early in the winter sales can be very good but a late snowfall or two or three mild winters can kill demand. The market is also concentrated in a few areas. In Europe it is mainly confined to Scandinavia, Germany and Austria whilst in North America it is mainly in New England and the states and provinces near the US/Canadian border. These tyres are popular in Japan but not elsewhere in Asia. However, new markets are developing. The most recent upsurge in demand is coming from Eastern Europe and Russia – areas which have severe winters and, until recently, have had little exposure to the latest developments in tyre technology.

56

Light Vehicle Tyres

More intriguingly there is an increasing interest in markets that have more temperate climates such as the Netherlands, northern France and the UK. This is mainly because of efforts by manufacturers to educate the motorists and, in particular, to offer a storage service for their winter tyres (and wheels) over the summer. In 1995 winter tyres accounted for 0.5% of the Dutch market but by 2002 this had risen to 7%. This was done initially by capitalising on a bad winter but the effect of this soon wore off. Eventually Vredestein, the indigenous manufacturer, teamed up with a leasing company and Euromaster, a retail chain owned by Michelin. The interest in such a venture for the manufacturer and the retailer is obvious but the leasing company wanted to differentiate itself from its competitors. The combination proved effective and their success encouraged other manufacturers and retailers to launch their own promotions. This is not an easy concept to get over to motorists but the Dutch experience shows that it can be done. The market is likely to grow at a faster rate than the general tyre market but the growth is unlikely to be consistent. It will vary considerably from year to year and the succession of mild winters has done little to improve the prospects for growth. Even though winter tyres are for wet and cold conditions it usually takes the first snowfall of winter to raise awareness of them and if that snowfall is late or doesn’t come at all it can have a dampening effect on sales.

5.5.4 Tuner Market Tuners are people, manufacturers or shops that specialise in aftermarket accessories for a particular vehicle. At the lower end of the market, cars such as the Peugeot 206, Honda Civic and Volkswagen Golf, as well as the Ford Focus, are popular. In North America the Honda Accord and Mitsubishi Eclipse are also prominent. BMWs, Mercedes-Benz and Lexus are the vehicles of choice at the opposite end of the socioeconomic spectrum. In both Europe and America the typical tuner is young (18 to 24), male and often from one of the ethnic minorities. According to the performance tyre brand manager of one of the major brands. “Their car is part of their entertainment. They hang out with their buddies and girlfriend. They’re saying, ‘I have the car, the clothes, the tunes. I like interactive things such as skateboarding and traditional sports.’ It’s all intertwined.” This market is dominated by sales of wheels as these have the most visual appeal but the sale of a set of wheels is invariably accompanied by the sale of a set of tyres. Plus sizing wheels and tyres can be the best way to improve both the performance and appearance of a vehicle quickly and relatively cheaply. By using a larger diameter wheel with a lower profile tyre it is possible to properly maintain the overall diameter of the tyre, keeping odometer and speedometer changes negligible. By using a tyre with a shorter sidewall, there is a gain of quickness in steering response and better lateral stability. The visual appeal is obvious, most wheels look better than the sidewall of the tyre, so the more wheel and less sidewall there is, the better it looks. However, low profile tyres are not restricted to the tuner market. They were first developed by the vehicle manufacturers as for some performance versions of standard cars they needed more braking power. The only way to achieve this was to fit larger wheels, thereby giving more space for bigger disc brakes, but the larger wheel still had to fit within the same wheel space within the standard body. The solution was a tyre with a lower aspect ratio and these were duly developed. They do have technical advantages in that they give better cornering response but this comes at the expense of ride comfort. This is not of major concern to the enthusiasts buying performance vehicles (or to the tuner buyers who try to make standard cars look like performance specials). In effect it is almost a fashion market; it makes a statement. However, the tuner market is difficult to quantify in size since tuner car enthusiasts buy their tyres from a variety of sources including the internet and mail order companies. In the performance segment, the popularity of items can come and go in as little as six to nine months. The problem is that once an item or colour or design is popular, everyone starts to buy it and then it’s not distinctive anymore. This applies to tyres just as

57

Light Vehicle Tyres

much as any other accessory so the manufacturers have to keep very close to the market with a constant stream of new variations and retailers have to be very careful with their stock levels. A typical product for this market is distinctive in more ways than just a low profile. Michelin designed a tyre specifically for this market incorporating colour as well as an aggressive appearance asymmetric tread, the Scorcher from B F Goodrich. It was the first passenger tyre in North America to sport red, blue and yellow colour bands around the tread. Later, it became the first tyre buyers could customise by specifying their own choice of hues and colour configurations in the tread. The latest twist to this product offer is a version of the Scorcher with a black-only tread, the same as every other tyre. As well as keeping buyer’s interest by frequent product changes in a market notorious for its short attention span and lack of loyalty, the new version tries to focus buyer attention on the H- and V-rated Scorcher’s high-performance capabilities. In developing the Scorcher, Michelin didn’t set out merely to produce a coloured tyre. It created an ultra-highperformance tyre at a carefully chosen price point and designed it so that colour could be put into it. The Scorcher’s high-silica compound not only makes the colour tread bands possible but also provides excellent wet and dry traction. According to the company an absolute novice can get behind the wheel and feel a distinct difference between the Scorcher and other tyres within its competitive class.

58

Light Vehicle Tyres

6 Technical Developments 6.1 Introduction Despite the large amounts spent on research by the tyre industry, the public perception of a tyre is that of a simple annulus which has not changed much since it was first developed well over a century ago. In fact, there have been many changes but they are invariably small and incremental and often invisible, as changes in the chemical composition of materials are not obvious. Moreover, a tyre has to perform a variety of functions, some of which oppose each other, so the changes that are made are always a matter of compromise. A tyre must provide grip when subjected to braking, acceleration or sideways motion, as in cornering, on all types of road surface and in all weather conditions. It is the interface between the vehicle and the road, so, as the vehicle becomes more powerful and more sophisticated, so too must the tyre. The various tyre products differ quite markedly in their technical content as can be seen in Table 6.1. Passenger car tyres provide by far the largest market for tyre manufacturers but at the same time they demand a high level of research and development. The OE market in particular demands a lot from the tyre industry as the vehicle designers set very specific requirements for the tyre manufacturers to reach. However, the industry usually achieves its objectives by incremental steps and by compromises on the properties of the tyre; it rarely introduces a really revolutionary product. R&D content HIGH HIGH HIGH HIGH MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM LOW Source: Bowfell

Table 6.1 R&D content by product Product Size of market Radial aviation Small Earthmover Medium Radial truck Large Passenger OE Large Radial motorcycle Small Agricultural Medium Bias aviation Small Passenger replacement Very large Bias truck Medium Bias motorcycle Small Bicycle Small

The last important technical breakthrough in tyre development was in 1946 when Michelin patented the radial tyre. The radial tyre has two major advantages over the cross-ply or bias-ply design. The cross-ply tyre is structurally much more rigid than the radial and consequently it does not ‘give’ as the vehicle corners. The radial tyre can be used safely at much higher speeds and it runs cooler, resulting in greater durability and less rolling resistance. The vehicle manufacturers, or at least those based in Europe, were not slow to recognise this superiority, and the design was first used as original equipment in 1951. By 1955 the majority of European manufacturers had adopted the design and this type of tyre rapidly became universal, although the US manufacturers were much slower to adopt the technology, not moving over to radials until the 1960s. Since then there has been no comparable advance in fundamental tyre design (though it is possible that the Michelin PAX design could cause a similar major shift if it is adopted by several vehicle manufacturers for their volume cars). Nevertheless tyre technology has made enormous progress in recent years. A typical tyre has become lighter and longer lasting with less rolling resistance. As a result it is capable of higher speeds and delivers much shorter braking distances on wet as well as dry surfaces. Almost all of this improvement is the result of small, incremental changes in the design and composition of the tyre but, over time, these can make dramatic differences in

59

Light Vehicle Tyres

performance. Table 6.2 illustrates the changes in a typical passenger car tyre that have taken place since 1975. Most properties have improved by at least a third and some by considerably more. Table 6.2 Tyre performance changes 1975-2000 Attribute Dry braking distance at 100 kph Wet braking distance at 100 kph Tyre life Maximum speed Weight Rolling resistance Source: Continental

Units

1975

2000

% Improvement

Metres

55

36

34

Metres

85

55

35

Kilometres kph Kilograms n.a.

35,000 210 11.6 1.3

50,000 300 8.0 0.9

43 43 31 30

Research will continue to bring in incremental improvements so that there will be gradual change in the performance of tyres but it does not operate in isolation. More of the research being carried out is defined, and in many cases directed, by legislation that is being brought in. 6.2 Legislative Environment The tyre industry has always worked within a framework of legislation but, until recently, the legislation has been essentially national. The operating environment is now changing, and the companies are faced not only with more legislation but increasingly uniform legislation. Although excess legislation is always unwelcome in any industry, the trend towards international uniformity in tyre legislation is of benefit to the multinationals, as it allows them to work to (or at least towards) common standards in many of their countries of operation. The three areas that affect the industry most are: environmental protection; consumer safety; and health and safety at work. All three areas are coming under scrutiny from governments and more and more legislation is being enacted.

6.2.1 Environmental Protection Environmental protection is probably the single most important driving force for general legislation at present, its ramifications are spreading wider and the tyre industry has not been excepted. There is an increased focus on requiring enhanced environmental protection in all areas relating to tyres – tyre production, tyre usage and tyre disposal. The most recent environmental measure of specific application to tyres is the EU Directive on tyre noise, which sets limits on the noise that tyres may make when in contact with the road. The Directive came into force in August 2001 and, within three years of that date, i.e., August 2004, the Commission must submit a report to Parliament suggesting even tighter noise limits. An even more immediate challenge has been established by the End of Life Vehicles (ELV) Directive. This is a Directive by the EU that all light vehicles must be dismantled at the end of their useful life, and materials re-used wherever possible. The specific target is that by 1 January 2006, for all end-of life vehicles, the reuse and recovery shall be a minimum of 85 % by weight per vehicle and year. Within the same time limit the reuse and recycling shall be increased to a minimum of 80 %. This will increase to 95% by 2015. Vehicle manufacturers have the ultimate responsibility for responding to this directive. There is little specific reference to tyres, but the Directive is having a profound effect on all components, and on tyres more than most. Tires make up about 3.5% of the vehicle weight, and

60

Light Vehicle Tyres

vehicle manufacturers will try to squeeze the last drop of credit out of the tyre as a way of fulfilling their obligations to achieve 80% reuse and recycling. One of the ways they could do this is by trying to incorporate as much recyclate as possible in the new tyres they buy. This Directive’s requirements need to be taken together with the ban on landfilling under the Landfill Directive, in order to develop a coherent industry strategy for the disposal of used tyres. The terms of this prevented whole tyres being placed in landfill by 2003 and shredded tyres will be banned by 2006.

6.2.2 Consumer Safety Until recently tyre safety has been of little concern to legislators, most countries leaving quality standards in tyres to be decided by industry groups in discussion with government agencies. There was informal co-operation between countries and the system seemed to work well. However, this situation has now changed as the TREAD Act in the US is a much more intrusive measure. As a direct result of the Firestone recall, the US Congress passed the Transportation Recall, Enhancement, Accountability and Documentation (TREAD) Act, which became law on 1 November 2000. The TREAD Act is a series of 12 congressionally mandated rulemakings within the National Highway Traffic Safety Administration to prevent catastrophic vehicle and tyre problems and expedite agency responses to product defects. Two key clauses in this Act mandated the introduction of tyre pressure monitoring devices on all new vehicles by 2003 and authorised the National Highway Transport Safety Administration (NHTSA) to revise the 35-year-old federal tyre testing standards. In June 2003, the agency issued new, stringent tyre performance testing standards – the first complete rewrite of the rules since 1968. By August, the tyre industry had filed several petitions for changes to the rules and there will be further discussions and lobbying before they are brought into effect. This is, of course, a sensible procedure, but there now appears to be much more interest in the tyre industry and legislators are increasingly willing to introduce direct legislation rather than allowing industry standards to be the main control. Moreover, there is much more liaison between regions. For example, a proposal put forward in Europe to have a ten year ‘sell by’ date on tyres was quickly picked up in the USA and a member of congress tried to introduce this into American legislation.

6.2.3 Health and Safety The normal health and safety regulations which apply to all industries affect the tyre industry but this is a burden shared equally by all companies. However, there is a growing disparity between the developed regions, where legislation demands roughly equal standards between countries in Europe and North America, and the countries of the developing world which lay a much lighter burden on companies operating there. So far this merely enhances the labour cost incentives of producing in these countries but, in time, it is likely to be brought up to the standards in developed regions. However, there is a lot of other legislation which could impinge on the tyre industry. Under a controversial European Commission proposal, known as REACH, or Registration, Evaluation and Authorisation of Chemicals, all chemicals made or sold in the EU risk being banned, unless they are accompanied by public data on potential hazards. According to the European Commission, the new policy is designed to replace 40 different pieces of legislation and to increase protection for people and the environment against damage caused by exposure to chemicals. Many of the chemicals used in the rubber industry are potentially hazardous. According to BLIC (Bureau de Liaison des Industries du Caoutchouc) the costs to the rubber industry of meeting the REACH proposals will be prohibitive. BLIC, the European federation of rubber industry associations, has

61

Light Vehicle Tyres

been coordinating a comprehensive risk assessment on zinc oxide, and has so far spent around ¼ RYHU ILYH \HDUV ZLWK WRWDO FRVWV SURMHFWHG DW ¼ IRU WKLV RQH FKHPLFDO $FFRUGLQJ WR BLIC data, the rubber industry uses some 4,000 different chemicals, most of which are likely to come under the terms of the policy. A simple calculation projects total costs of ¼ PLOOLRQ RQ the rubber industry. The industry employs some 280,000 people in Europe, so the projected cost is estimated at over ¼ SHU HPSOR\HH After intense lobbying by industry the Commission has softened its original proposals but will still involve over 20,000 chemicals. The lobbying battle will now move into the European Parliament and the Council of Ministers from national governments, and may drag on into 2005 and beyond. In the meantime the European Commission has acted on a narrower front by adopting a proposal to phase out the marketing and use of many polycyclic aromatic hydrocarbon (PAH) extender oils for the production of tyres. The ban, which covers extenders containing over 10 mg/kg of listed PAHs will take effect from the end of 2008. PAH-rich extender oils are particularly important for the production of summer tyres and high-speed rated tyres. The Commission’s proposal is intended to improve public health protection, according to Erkki Liikanen, the EC’s Enterprise Commissioner. ExxonMobil anticipated this by announcing that it would stop supplying Distillate Aromatic Extract oils (DAEs) by the end of 2003. These oils were traditionally widely used as processing aids and extenders in the tyre and rubber sectors. DAEs fell into disfavour starting in the mid 1990s, as a result of classification by the EU as potential carcinogens. Concerns about the health and environmental implications of DAE use were highlighted initially in Sweden. Since then, the tyre sector and its suppliers have started using alternative process oils.

6.2.4 Impact of Legislation In theory the enactment of the TREAD Act applies only to the domestic US market, but in practice its ramifications will be felt in Europe and, to a lesser extent, in the rest of the world. This is partly because the companies themselves want to standardise products wherever possible, but also because national regulatory bodies are working together much more closely than has been the case in the past. The European Commission has already stated that it wants to introduce mandatory tyre pressure monitoring systems into all new cars. However, complications can arise from this rash of new legislation and regulation as the interactions can be complex, with new laws impacting on existing ones. For example, Tyre Pressure Monitoring Systems (TPMS) will increase the weight of tyre/wheel systems and affect the balance, but this could affect the proposed ban on lead balancing weights under the ELV Directive. These illustrations show the increasing, and sometimes conflicting, regulations that are being imposed upon the tyre industry. The process will continue and almost certainly accelerate, so the industry needs to develop a coherent strategy to deal with this. Regulations no longer affect the industry purely at the margins – they now impact on the heart of the process and can shape the future fundamentally. The industry needs to seize the agenda and be proactive rather than reactive. The disparate authorities are not going to be able to discern for themselves how their demands interact to the detriment of the industry, so the companies or their trade organisations need to tell them. More than that, they need to anticipate and initiate legislation, putting forward ideas as to how the aspirations of the various interest groups can be met. The key to all this is communication. There needs to be continual contact with government and quasi-government bodies at all times and at all levels. Moreover, there needs to be more contact between regions and between governments in order to ensure that regulations in one area are compatible with regulations elsewhere. The obvious body for this is one or all of the trade associations, but to do this job properly they need much more funding from their members and a much enlarged management to prepare and implement these strategies. It is unlikely that the industry will be willing to act decisively or quickly to do this, but delay could be costly as the industry is currently finding with the consequences of the TREAD Act.

62

Light Vehicle Tyres

6.3 Research and Development

6.3.1 Research and Development The tyre industry spends over $2.5 billion on research and development each year. In addition there are significant amounts spent in universities and by the material producers, which supply the industry. The total amount spent on R&D is estimated to be well over $3.5 billion. Relatively little fundamental research is carried out by the tyre companies, but they keep contact with various universities and research institutes in order to be aware of interesting developments. In addition the material suppliers are researching their own areas of expertise and they keep the companies informed of improvements in compounds or reinforcing materials. Most of the $2.5 billion is spent on development – bringing to market new tyres with improved specifications. This work is usually done in collaboration with an OEM in order to develop a tyre with particular characteristics to suit a new vehicle they are bringing out. However, sometimes the tyre manufacturer perceives a wider market opportunity and develops a whole family of tyres specifically for the aftermarket. The Goodyear Aquatred or Michelin Pilot range were developed in this way.

6.3.2 Materials Development The most important materials used in tyres apart from natural and synthetic rubbers are carbon black, silica, steel and fibre reinforcement. There are continual developments in all these areas but they are usually small developments, not dramatic changes. Natural rubber Natural rubber and synthetic rubber are competitors but they also complement each other and the natural rubber industry has learnt to live with synthetic rubber. Considerable work is being carried out with natural rubber but the emphasis is on improving the quality and particularly the consistency of the material. In the main growing countries geographic expansion of the plantation industry was difficult for both economic and political reasons and instead increased productivity and reduced cost of production have become the critical factors in making the plantation industry remunerative and viable Synthetic rubber Developments in synthetic rubbers have also had problems. Prices in the volume SR sector – butyl, butadiene and SBR – have been very low for a long time. No-one is making enough to both reinvest and to get a sensible return on the business, despite major efforts to improve efficiency. This has held back research and development to some extent but there have still been improvements. The industry is now restructuring and it is likely that the more focused companies will apply more resources to development in order to raise their margins. Carbon black Among the factors that have affected carbon black loadings are a shift in the product mix away from bias ply to radial tyres (which last longer and use less carbon black), and a trend towards lower carbon black loadings in general (to reduce rolling resistance and fuel consumption). At the same time there are also a number of factors at work within the industry which are leading to an increased use of the material, one significant one being the longer warranties offered on all-season radial tyres, but the most important is the continuing growth in high performance tyres. The latest step is the development of carbon blacks with reduced HBU (heat build up) and rolling resistance. Silica Since 1990 silica consumption in the passenger tyre tread market has grown dramatically, particularly in Europe, and significant growth is also being seen in both North America and Japan.

63

Light Vehicle Tyres

It is claimed that a typical tyre tread, incorporating precipitated silica, now gives a superior performance to carbon black in several key areas. Using the carbon black performance as an index, silica can give improved performance in three areas; wet traction, snow traction and rolling resistance. One of the major problems with silica is that it lacks the requisite static dissipative qualities for heavy use in tyre treads. Tyre companies, particularly Michelin, continue to experiment with higher silica loadings, but they still find that the rubber is building up a static charge from contact with the road surface. Carbon black is fighting back against silica in passenger tyre treads, and the view is beginning to develop that in the longer term any further displacement of carbon black by silica will be minimal. Steel cord Until now steel has only been used for steel belts in passenger tyres, not body casings. However, the introduction of ultra-tensile steel has led the way to its use as the next generation passenger tyre reinforcement material. Stronger steels are harder and more brittle so the big problem has been how to draw them into fine wires. This problem has now been mastered and further developments will see more ultra tensile steel. The biggest market for this high strength steel will be for the sidewalls of runflats if this market grows as predicted. Steel would give the casing sufficient integrity to achieve runflat capability, whereas until now only rayon has been suitable. It can impart the dimensional stability to the casing, which is necessary for a runflat, whereas neither polyester nor nylon measure up because they do not meet the high heat-resistance demands and aramid is too expensive. Textiles The demand for tyre cord has generally shifted towards cheaper materials but as the technical demands on tyres are increasing there is a slight shift back towards more expensive materials such as aramid and rayon. For example, the use of aramid is growing at about 10% per annum but from a very low base and it is never likely to become a dominant fibre for use in tyres. However the shift towards high performance tyres and particularly runflat tyres is leading to an increased demand for high performance fabrics. Polyester research is ongoing and there have been considerable improvements in some properties but it cannot match the heat resistant properties of the more expensive fibres.

6.3.3 Tyre Property Improvements There have been changes not just in the materials of which tyres are made but also in the design of these tyres leading to much improved physical properties. Some improvements are brought about by pressure from consumers (durability), some by regulations (noise reduction) and some by the manufacturers themselves (wet surface performance). However, most improvements come about as a result of all three influences. Again, as with materials, the changes are mostly incremental but they can make a substantial difference over a period of years as Table 6.2 demonstrated. Durability In the early days of the motor car it was not uncommon for motorists to carry six spare tyres on a long journey. Thanks to poor design and bumpy roads, the average driver in 1900 used 37.5 tyres each year. Both tyre quality and roads have improved dramatically over the past century but there is still pressure to improve the life of tyres. Since 1903 the average tyre life has risen from about 500 miles to 44,700 miles. The cost per mile has dropped from about 3 cents per mile in the 1920s to about 1.8 cents per mile now. These improvements have come about by changes in the overall tyre design, using different materials for the tread and improvements in roads and their surfaces. In North America companies have felt confident enough to guarantee a tyre for life (albeit with numerous conditions) but they have not yet taken this step in Europe because the roads are much more varied and there are far more bends and corners.

64

Light Vehicle Tyres

Improvements are continuing. The National Highway Traffic Safety Administration (NHTSA) tests virtually all tyres on the American market for various properties of importance to drivers. In early 2004 it declared from test results that tyres are better at resisting wear than they were in 2000. However, as always in the tyre industry, advances cannot be made on all fronts simultaneously and tyre ratings for traction performance and heat resistance have seen little change. Weight This is particularly important to the OEMs, as they are continually looking for weight savings wherever they can, in order to improve fuel consumption. Reducing tyre weight is particularly important as it reduces the unsprung weight of the vehicle. Reductions in the unsprung mass improve the handling properties of the car. No dramatic improvements have been made in reducing the weight of tyres, but each successive generation is slightly lighter than its predecessor, with thinner sidewalls and, in certain cases, the substitution of steel by fibres. Sometimes the reduction can be substantial – Michelin claims that its new Proxima tyre which is still in the prototype stage is 20% lighter than the Energy tyre it will probably replace. Over the longer term the weight savings have been even more dramatic. In 1980 the MXL tyre weighed 12 kg while the equivalent new Proxima weighs only 6.5 kg. However, the development of runflat tyres could reverse this trend as these tyres are considerably heavier than their standard equivalent. If runflats become popular quickly the average weight of tyres will increase in the short term but in the longer term average weight will still decline. This is too important a characteristic for the manufacturers not to do all they can to reduce it. Noise Although there are many sources of noise in a moving vehicle, for speeds above 60 km/h in cars, tyre noise becomes the dominant noise source, the tyre and road surface combined accounting for 78% of audible noise. A tyre's tread contains block shapes that smack against the road surface like tiny hammers. Those tread blocks and underlying reinforcing belts vibrate and radiate energy outward, producing sound much like the vibrating cones in stereo speakers. Different portions of the tyre vibrate faster than other portions, producing more noise. However, the pavement that the tyre is travelling over can make a dramatic difference to the level of noise produced. The trend towards wider tyres has increased the problem as these have a much larger contact patch which gives rise to more noise. Tyre/road noise is one of the major environmental problems of modern society and is not yet under control. The EU has made several attempts to legislate for this problem but these do not fully address the issue. It has published vehicle noise directives and, more recently, tyre noise directives. However, tests carried out on the values for the tyre noise directive demonstrated that virtually all tyres on the market met this standard. It would seem that the present limit values are too high to bring about advances in the state-of-the-art. No substantial changes in the directive are foreseen for several years as even a lowering of limits by 1-2 dB as suggested by the EU in 2007 or 2009 would be ineffective. What drives the tyre makers to make quieter tyres is the vehicle noise directive, not the tyre noise directive. However, the testing methods in use are the subject of a great deal of controversy and it is this lack of consensus that is delaying more legislation. There is a debate whether the tyre should be tested as a single entity or as part of the larger vehicle. Similarly it is very difficult to assess whether it is the tyre or the road surface that is producing a particular noise. Nevertheless, this aspect of tyres must be given attention as pressure is sure to build up demanding quieter tyres. Rolling resistance This characteristic of tyres was not given much attention until recently; far more attention was paid to grip and braking capability. However, the increased emphasis on economy and environmentally friendly equipment has now given it much more importance. Again a compromise has to be reached between the ability of the tyre to ride easily over the surface but still be able to grip in all

65

Light Vehicle Tyres

conditions and to bring the vehicle to a halt in as short a distance as possible. The addition of silica has made this possible but a great deal of research remains. This material proved very difficult to disperse evenly in compounds and, when this was resolved, tyres made with the new compound suffered from poor abrasion resistance. Another of the major problems with silica is that it lacks the requisite static dissipative qualities for heavy use in tyre treads. Tyre companies continue to experiment with higher silica loadings, but they still find that the rubber is building up a static charge from contact with the road surface. Wet grip Wet surface performance has always been an important characteristic of tyres and a major element in performance testing. On a wet road the tyre’s tread pattern sweeps water from in front and then drains the remainder through the grooves in the tread. As a result the influence of tread depth in wet accident statistics is not disputed. Even when vehicles have other electronic safety features such as traction control, stability control, and anti-lock braking systems the ability to remove water from the tyre contact patch via the tread pattern and the road surface will remain critical. No matter where you drive in Europe, you are facing a lot of rain: according to the yearly weather statistics it rains in Brussels, Frankfurt, London, Paris, Warsaw and Stockholm three out of five days, even cities like Athens, Madrid and Rome have almost 100 rainy days per year. European drivers across the continent have to drive an average of 141 days per year on wet roads. The design of the tread has an important influence over wet grip as it is important to remove excess water as quickly as possible. Goodyear’s Aquatred took full advantage of this, helped by a design that not only was effective but also looked effective. However, only so much can be done by tread design and now most research on improving wet grip is concentrated on new material developments. The wet grip characteristics of tread compounds, whether based on carbon black or silica, may be improved by using a new acrylonitrile-, styrene-butadiene terpolymer (NSBR). High performance Whereas good tread wear and a comfortable ride are the hallmarks of a mass-market tyre, steering precision and maximum handling are the most desirable characteristics of an HP or UHP tyre. Therefore, the materials, design and engineering of a HP tyre are very different from those of a regular tyre. A high-performance tyre has a more aggressive and asymmetrical tread pattern than a mass-market tyre, to enhance precision and manoeuvrability. The tread compound is designed for optimum performance in temperate conditions. When the temperature drops substantially below freezing, the traction deteriorates. UHP tyres have directional tread patterns designed to channel water from under the tread and prevent hydroplaning. There are no sipes (small grooves) in those tread patterns, because that takes rubber away from the road. Unlike mass-market tyres, the treads on UHP tyres are designed specifically for the left and right side of the vehicle, which creates major problems if they are mounted incorrectly. If they are put on backwards, water is drawn under the tyre, increasing the chances for hydroplaning. In terms of construction, mass-market tyres have bodies made almost entirely of polyester, which is pliable and durable for a soft ride and long life. Most HP and UHP tyres, however, contain nylon or rayon which have better heat properties than polyester and can absorb shock more effectively. HP and UHP tyres probably have a harder bead filler than regular tyres. Hard fillers improve steering response. In UHP tyres, there is often extra reinforcement – of nylon or steel – along the bead to stiffen the sidewall. Also because of the high-speed factor, an HP tyre will be slightly non-radial, slightly angle-ply compared with a true radial. The partial cross-ply structure gives extra stiffness. Nylon cap plies are a construction feature that became notorious during the Ford-Firestone recall controversy. This began as a result of Firestone being forced to recall about 10 m tyres in August 2000 because they appeared to be losing their tread when driven under-inflated at high speed. It appeared to only happen when these tyres were fitted on Ford vehicles and there was a great deal of recrimination between the two companies. In a further dispute about another type of tyre Firestone refused to accept responsibility for defective workmanship and Ford replaced the tyres themselves,

66

Light Vehicle Tyres

leading to further animosity between the two companies. Eventually Firestone refused to supply Ford with tyres, breaking a relationship that had lasted for over one hundred years. Consumer advocates and lawyers made an issue of cap plies, insisting that all tyres should have these for safety. However, the tyre manufacturers maintain that cap plies are necessary only on tyres designed to be driven at very high speeds. Cap plies are universal on ultra-high performance tyres. At speeds of 125 or 130 miles per hour, centrifugal force tends to pull belts off, and cap plies prevent this. They are not for safety, just for speed. In some UHP and Z-rated touring tyres, such as those used as OE for Mercedes-Benz and BMW, aramid is used as a belt material. It is extremely strong and lighter than steel, but its high cost prevents its wider use. High performance tyres also tend to be wider than mass market tyres and to have a lower aspect ratio. Wider tyres give better grip and the taller the sidewall, the greater the shock absorption. Taller sidewalls are desirable in mass-market tyres, where as smooth a ride as possible is required, but not in UHP tyres, where drivers want to feel the road. Aspect ratios can go as low as 30 for UHP tyres, with widths in the 305-315 range. This compares with 55-60 and 235245 for HP tyres and 65-70 and 215-225 for mass-market tyres. Because of these specific requirements high performance tyres are at the forefront of research and development with the major manufacturers. Winter tyres Ice and snow grip are possibly the most difficult things to test on a tyre. Not only are the physics of ice grip poorly understood, but it is not even clear which variables affect that grip. The first winter tyres simply featured increased tread depth, but improved sipe technology and compounds that are flexible at low temperatures have increased performance significantly. Sipes are small grooves or slits in the tread of the tyre which promote water dispersal. Typically there are now 2,500 sipes in a winter tyre mould whereas initially there were only 100 or 200 because it was extremely difficult to get them out of the mould. In addition they have become more complex in shape. Most manufacturers are researching different compounds which will react better with ice and hardpacked snow. Nokian, for instance, has a tread rubber compound that contains rape-seed oil, which the company claims offers both environmental and performance advantages. Natural rubber is very bad in the wet and has handling disadvantages. Different blends of synthetic rubbers are used and several companies use a hard base underneath a soft cap instead of one full tread cap. Research is being carried out into the direct coupling of silica with polymers and the use of various additives. However, new academic research could lead to a new way of improving winter performance by using electrical charges. The mechanics of the ice traction system are relatively straightforward. A mild electrical current through the tread creates an electrical charge on its surface. This charge has the opposite polarity from the ice on the road and creates a thin coating of ice on the tyre. Now the two oppositely charged ice surfaces can grip each other and this provides the traction necessary to steer and slow a vehicle over ice. Although this is still a long way before it is likely to be adopted it would seem to be technically feasible. Microthin electronic sensors and conductors could be embedded in a tyre. As tyre manufacturers are already incorporating traction sensors and other microelectronics into tyre and wheels, this would not be an enormous change in the manufacturing process. 6.4 Runflat Tyres The most dramatic innovation in tyre technology in the last few years has been the introduction of runflat tyres into the mass market. They have been available for at least a generation, starting with the Dunlop Denovo but they have taken a long time to reach technical maturity. Early versions were heavy and uncomfortable for passengers but many of these problems have been overcome and they are beginning to show strong market growth. Sales amounted to an estimated 2 million units in 2003 and current estimates suggest a doubling of sales in 2004 to about 4 million units. If the take off point has been reached there will be rapid substitution of conventional tyres over the next decade.

67

Light Vehicle Tyres

However, there are three different and distinct approaches to the problem and it is not yet obvious which will win. The most successful so far has been the self-supporting sidewall design. The sidewall is reinforced with extra rubber and fabric so that when the air leaks out there is still sufficient rigidity to carry the load of the vehicle and passengers. The disadvantage is that the rigid sidewalls produce a less comfortable ride. It works much better with low profile tyres and relatively light vehicles. This was the design favoured by Goodyear when they introduced their EMT tyre in 1997. The other major manufacturers quickly followed with similar designs but Bridgestone and Continental preferred to promote the idea of a support ring. These rings, made of metal or plastic, are fitted between the rim and the tyre to give physical support and to prevent the inner surfaces of rubber scraping against each other. A normal tyre is destroyed by running at zero inflation pressure, partly by the excessive deformation and cycling of the sidewalls and partly by the rubbing of one internal surface against another. This abrasion quickly destroys the inner liner and leads to significant heat build up even at very low speeds. The support ring prevents this and offers a small amount of flexibility to make the ride a little less uncomfortable in the deflated condition. The third runflat technology is the PAX system developed by Michelin although Michelin claims that it is much more than a mere runflat design – it is a revolutionary method of fixing the tyre to the rim. It’s runflat capability is provided by a combination of shorter sidewalls and a support ring inside the tyre. This system is the most technologically advanced but it requires a special rim and is much heavier than the other solutions. A typical tyre/wheel combination for a small car weighs 17 kg and a self-supporting tyre would add one or two kilograms. The equivalent PAX system weighs about 21 kg. Nevertheless the PAX system is attractive because it offers much improved fuel economy and thin sidewalls which deliver better performance, handling and comfort. PAX is now offered as an option on a few vehicles but it will probably tend to be used on larger, heavier vehicles where comfort is important. At present the self-supporting sidewall design is leading sales in the market, closely followed by the support ring. The PAX system is a poor third. However, this situation could change quickly if more OEMs followed the lead of BMW by specifying runflats as standard. It may well be that no particular design becomes pre-eminent. PAX could be used for heavy duty applications such as 4x4 vehicles and diplomatic cars; the support ring for larger saloons and self-supporting sidewalls for small- and medium-size cars. 6.5 Pressure Sensing This innovation has been in progress for several years as it is a necessary complement to runflat tyres but the real boost came with the Firestone recall in 2000 and the subsequent legislation. The TREAD Act, which came into force in November 2000, required the NHTSA to publish performance standards within one year and to implement this within two years. In effect, all new vehicles sold in the United States between November 2003 and model year 2007 must be fitted with such a device. The two main systems which it approved are direct and indirect measurements. The direct systems transmit an absolute measure of pressure into the vehicle electronics whilst indirect systems measure tyre diameter to detect when there has been a significant pressure loss. There is no doubt that direct systems are more accurate but there was considerable pressure from vehicle manufacturers to endorse indirect systems because these systems would be cheaper to install, using as they do, existing technology such as ABS. Tyre makers wanted direct systems that cost around $65 per vehicle whilst vehicle makers supported the indirect approach, estimated at around $22 per vehicle. However no one was happy with the deflation limits of 25% for direct and 30% for indirect systems which NHTSA proposed. Since then there has been considerable controversy in the USA with consumer groups taking NHTSA to court in order to press the claims of direct systems as being superior. In retaliation Ford

68

Light Vehicle Tyres

has hardened its stance for indirect systems, citing a customer survey it had carried out. It claims that customers had seen major problems when they switched from winter tyres to summer tyres. First there had been radio interference from the tyres stored in the garage and in addition the whole system had to be recalibrated when the tyres were swapped over. Even though these claims are serious they still only affect a minority of drivers worldwide but it is a substantial minority and their problems cannot be ignored. There are also compatibility problems when drivers replace an OEM tyre with a replacement tyre but these have not yet been in evidence because the systems are so new. In August 2003 the court ruled in favour of direct systems saying in its ruling ‘Unlike direct systems, which work in virtually every instance in which one or more tyres are significantly underinflated, indirect systems do not warn drivers in about 50% of those instances. Absent any satisfactory explanation in the rulemaking record, the adoption of a standard that permits installation of plainly inferior systems seems to us to be arbitrary and capricious.’ NHTSA had the opportunity to appeal the ruling but it has since decided to rewrite its regulation although no timing has been set out. Originally it had promised to make a final ruling by March 2005 for implementation by November 2006 and it will probably stick to this timetable. In September 2004 it published a notice of proposed rulemaking which evaded the conflict by merely publishing performance standards rather than methods. This was immediately criticised by many in the industry and is unlikely to be the final word. More than three dozen suppliers – including BERU, Bosch, Gycloid, Delphi, Goodyear, Infineon, Lear, Motorola, Schrader Electronics, SensoNor, Siemens, SKF, SmarTire, STMicroelectronics, Texas Instruments, TRW, Visteon and Wabco – as well as every major OEM and tyre manufacturer are now involved in the technology, leading to a huge range of potential solutions. Already some of these names are dropping out of the market or combining with others but the familiar pattern of automotive component supply has not yet emerged – three major players dominating the world market. Ultimately, many engineers believe that tyre-pressure systems will not be truly complete until they are self sufficient. They should not have to rely on a separate power source, i.e., a battery and they should release drivers from the onerous task of looking for service stations that offer pressurised air. Ideally, such systems would automatically pump up the tyres while a vehicle continues its journey. A number of manufacturers are working on this idea using either inertia-powered air pumps or separate compressors. The other major development is to develop sensors which do not need batteries as these will probably have to be replaced at least once in a tyre’s life. Again, a number of technologies are being applied but no obvious winner has yet emerged. However, the Japanese manufacturer, ALPS Electric launched a transponder-powered device in mid-2004, becoming the first in the field. 6.6 Future Development Runflat tyres and pressure sensing systems go hand-in-hand, as no responsible manufacturer will fit runflat tyres unless there is a reliable system which tells the driver that a tyre has lost pressure. Both these developments have grown strongly in the last two years but there are alternative and competing technologies for both and it is not yet clear which will become the most successful. However, all the systems have focused attention on the tyre as a key element in controlling the vehicle. The tyre is at the interface between the vehicle and the road and, as such, it can play a much more central role in vehicle handling. The first moves have been made to use the tyre as a source of information. Michelin, Goodyear and other companies have developed a radio frequency identification (RFID) transponder that is manufactured into the tyre and stores vital tyre identification information. With this technology, the tyre identification number can now be associated with the vehicle identification number (VIN) making the tyres uniquely identifiable with an individual vehicle, telling when and where the tyre

69

Light Vehicle Tyres

was made, maximum inflation pressure, tyre size, etc. There are still technical problems as well as questions about standards (which radio frequency should be used and should it be an international standard) but this type of chip will be the first step in developing an intelligent tyre. Pressure is now coming from the retail sector with Wal-Mart announcing that its top 100 suppliers must comply with a requirement to Radio Frequency Identification each case and pallet delivered to its stores by 2005. Siemans and Goodyear have announced a further step in this direction with what they describe as ‘the second generation of tyre pressure control systems’. This unit is more than just a pressure sensor, as it can record mileage and tyre wear, moving a step towards the ‘intelligent tyre’. The new sensors operate with an indirect power supply and allow electronic identification of the tyres, as they are embedded into the tyre carcass, rather than part of an external sensor fitted to the wheel. As well as the sensor, the system incorporates an antenna in the tyre and a transmitter/receiver in the cabin. It is this latter unit that supplies the tyre with energy. Should there be a drop in pressure, the sophisticated software recognises this and sends a warning to the driver. Additionally, a chip in the tyre records the mileage and the distance that can be travelled without sufficient pressure. Almost every tyre company is keen to emphasise its ability to develop integrated systems which can optimise braking and steering performance in cars. Bridgestone has set up a special division within its Tokyo technical centre to look at integrated systems in suspension, braking and steering. Most tyre companies have been developing chip-in-tyre systems for some years as a way of keeping track of truck tyres, and this technology is now being adapted to car tyres as a way of measuring forces and moments, transmitting them to the car's electronic management systems. Most of these changes are perhaps a few years away from commercialisation, but the work on TPM systems has stimulated a wide range of research projects. Continental has taken a rather different approach to the problem of taking information from the tyre in order to apply it to other vehicle systems. Rather than estimating such information based on secondary data such as engine torque, brake fluid pressure, wheel speed and vehicle acceleration Continental’s SWT system (Sidewall Torsion System) now takes this information directly from the tyre by measuring sidewall deformation from the suspension strut. The tyre sidewall is marked with a magnetic material in two rings, one near the belt and one near the rim. One marking ring and the corresponding sensor constitute a conventional ABS pole wheel. The time difference between passages of the boundary between adjacent poles through a fixed point is measured from the vehicle with active magnetic-field sensors. This SWT system is currently in prototype phase. The basic functionality and applicability of the sensor has been demonstrated but there is still a long way to go before it appears on production tyres. All parts of the system must be made robust enough to ensure that failures are minimised. The system layout must ensure that the failure of a component is recognised and that drivers can control the vehicle safely at any time. Moreover, this prototype system only measures one of the forces acting upon the tyre. A truly intelligent tyre will measure all forces and such measurements will eventually be incorporated into the system. For example Continental is collaborating with Darmstadt University to integrate wireless surface acoustic wave sensors into tyres. Potentially this can provide an on-vehicle method of measuring tread deformation in response to driving conditions. For other factors involved in ‘reading’ the tyre sensors embedded in the tyre will be used. Research is in progress to mathematically model the tyre-to-road frictional contact in terms of the radial force and ground plane stresses. If it can be proved that these forces effectively control the vehicle and if they could be continually measured in each of the tyres in motion, the tyre would become the key sensor in vehicle control technology. The vehicle could respond continually to the measurement of tyre-to-road friction and this data could be coupled with satellite navigation technology. Then, the data on tyre road friction, together with vehicle speed, programmed direction, road geometry and traffic density would be sufficient to ensure that the driver is unable to drive in a manner which would be likely to cause an accident.

70

Light Vehicle Tyres

However, a truly integrated intelligent tyre is far into the future. In the more immediate future developments are also taking place in the physical design of the tyre. Michelin’s PAX tyre has already been discussed in the context of runflat tyres but it is primarily designed to become a new high safety, high performance, low-rolling resistance tyre wheel. The PAX system involves a special wheel rim, and a dedicated cover, an inner ring support to assist runflat capability and an inflation pressure detector system. The rim is much flatter than the standard deep well rim. Consequently the tyre is ultra low profile, and there is more wheel space available for brakes and the suspension strut. This allows designers either to incorporate bigger wheels in the same body space or use the same size wheels and utilise the extra space saved by enlarging the cabin. The design means the sidewall loads are carried straight into the wheel rim with almost no sideways component and the sidewalls themselves are very evenly stressed. The result is a tyre which delivers an excellent combination of grip, steering response and lowered rolling resistance. However, no matter how good the design, Michelin would have been unable to succeed on its own as OEMs do not like single-sourcing such unique components. One or both of the other two major suppliers were needed to adopt the system before the carmakers would fit it to mass production vehicles. Consequently Goodyear has agreed to manufacture the tyre under licence and Pirelli, Sumitomo and Toyo have also become licensees. This should remove the doubts about single sourcing but the tyre will still need time to be widely accepted. Vehicle designers have to incorporate the radical new design in new models, not existing designs. At present it is offered as an option on several Renault models and as standard equipment on the Rolls Royce Phantom. It will take some years before this concept can be judged as to whether it is a commercial success. It will only be a success if the design advantages of the new wheel overcome the traditional conservatism of the industry.

71

Light Vehicle Tyres

72

Light Vehicle Tyres

7 Recycling 7.1 Introduction The disposal of scrap tyres is a problem that has been growing for decades. A used tyre appears to have very little value or use, and consequently it was invariably discarded once it had reached the end of its useful life. When the volumes were small, the problem was containable, but with the growth of vehicle sales the number of used tyres has grown rapidly in the past few decades. A vulcanised rubber tyre is a difficult recycling challenge. It is composed of different materials, often including steel, so it is difficult to disassemble. It comprises many different types of rubber, physically mixed together, which are impossible to separate. It has undergone a chemical vulcanisation process which cannot be reversed. Even if no attempt is made to salvage the component parts, the whole tyre is big, bulky and difficult to find an application for large numbers of them. Even if they are stockpiled and used as landfill they are unsightly, form a breeding ground for mosquitoes and are dangerous in that they present a fire hazard. However, despite the associated problems, both governments and the industry itself have recognised that a solution, or a range of solutions, must be found. Consequently most of the major tyre companies and their trade associations are engaged in exploring ways of reducing the environmental impact of used tyres, and they are encouraged in this, to a greater or lesser extent, by the governments where the problem is greatest – North America, Europe and the Far East. The typical composition of a car tyre is illustrated in Table 7.1.

Material Carbon black Natural rubber Synthetic rubber Steel wire Extender oil Organic fabric Other petrochemicals Other Total

Table 7.1 Typical composition of a car tyre % of total weight North America 28.0 14.0 27.0 10.0 10.0 4.0 4.0 3.0 100.0

Japan 26.3 28.0 21.8 9.6 5.9 3.7 0.0 4.7 100.0

7.2 Hierarchy of Waste Most of the constituent materials, including carbon black and synthetic rubber, are derived from crude oil and they have a high energy content, so the material could be burnt, but this is not necessarily the most ecologically preferred course. In environmental terms there are five broad alternatives that address the challenge of scrap tyres. This hierarchy of alternatives demonstrates the relative desirability of each approach. In descending order of preferment the alternatives are as follows. 1. Reduction – reducing the number of tyres that need to be scrapped. 2. Re-use – either retreading to make a new tyre or using scrap tyres for other purposes. 3. Recycling – treating the materials in a tyre so that they can be used in other products. 4. Recovery – essentially burning in order to recover energy. 5. Landfill. Ideally the amount of waste should be minimised and as much as possible re-used. Only then should disposal methods be considered and even here recycling, or converting into other useful products, is preferable to burning or simple tipping. Progress is being made in all areas but the

73

Light Vehicle Tyres

more difficult applications tend to be higher up the hierarchy of waste and less progress has been made with these.

7.2.1 Reduction The best way to reduce waste is to use less tyres but as it is unlikely that less cars will be bought in the foreseeable future the alternative is to make tyres last longer. The industry has made considerable progress in this respect, not just for altruistic reasons, but because longer-life tyres provide a marketing advantage. The big breakthrough came with the development of the radial tyre, which lasted twice as long as contemporary cross ply tyres, but there are still improvements being made now as more resilient rubber compounds are developed. Goodyear estimates that the average mileage of a tyre has nearly doubled in the last 25 years, from about 25-27,000 miles in the 1970s to an average of 43,000 miles today. However, this is not enough to make a real impact on the amount of waste generated so other alternatives have to be addressed.

7.2.2 Re-use This has much more potential, not just for reducing the volume of waste, but also in the energy that is saved in producing new tyres. The simplest form of re-use is the sale of used tyres to other users. Export. This activity has thrived as the legal requirements for tread depth have been increased. The de facto worldwide standard tread depth is now 1.6 mm, and many drivers change tyres before this minimum requirement is reached. These tyres have a value, and they enter a brisk international trade. Most of these end up in developing countries where they are often used until they are worn through to the casing. In the short term this appears to be a way for developed countries to get rid of embarrassing waste but in the longer term it is not a satisfactory solution. Quite apart from the moral question of selling substandard tyres, developing countries are now a prime target for tyre manufacturers in India, China and South Korea offering new and relatively low cost tyres. In addition a number of developing countries are questioning the idea of importing used tyres that will add to their own environmental problems. Thailand has already announced that it will ban the import of used tyres. Re-grooving. The cheapest method of renewing a worn tyre is to re-groove it. This can only be done legally with truck tyres, as passenger car tyres do not have enough thickness of tread rubber to allow the process. Although it is done with passenger car tyres the numbers are small and declining. Retreading. The retreading operation is the removal and subsequent replacement of worn tread rubber to provide another tyre life. It fulfils the hierarchy of waste requirements in two ways, meeting the primary objective of best environmental practice by minimising the use of raw materials, whilst also meeting the second best objective of re-use. The word retreading is now used in a general sense and covers several accepted methods of reconditioning a worn tyre such as remoulding, top capping and recapping. Remoulding too is now fully accepted for truck tyres but the remould of passenger car tyres is rather more contentious, and the manufacturers do not associate themselves directly with this. The industry has suffered in the past from some quality problems and from some unscrupulous operators giving all the firms a bad name. Retreading is carried out in all three of the major tyre producing regions – Japan, North America and Europe – but the former two regions concentrate mainly on tyres for commercial vehicles. Japan retreads about 4% of its used tyres, and this has fallen steadily from around 10% a decade ago. South Korea retreads about 10% of its used tyres, whilst the USA treats about 8%, or 20m tyres. In Europe the quantities are larger because far more passenger car tyres are remoulded, although it is difficult to make generalisations because the various regional markets are subject to differing influences. The industry prospered in the early 1990s as larger firms became involved and quality standards rose, but from about 1997 the retreading industry across the whole of Europe

74

Light Vehicle Tyres

went into steep decline. The problems had started as early as 1995 as the major manufacturers introduced budget brands to build up their market share and the financial problems in the Far East at that time then led to a flood of further imports. The passenger tyre industry is now in severe difficulties, and many firms have gone bankrupt or exited the industry. In the medium and longer term the increased emphasis on recycling and protection of the environment should offer some hope for the industry, but in the meantime it has to survive the short term and that is not guaranteed. Whole used tyres. There is a market for used tyres without any modification at all. Farmers use them as stock feeders and as cover weights for stored feed. They are used in marinas and docks as bumpers and more recently experiments are being made to construct artificial reefs and breakwaters. Other uses are being tried out such as whole houses made of tyres or children’s playgrounds but none of these applications make much of an impact on the annual output of scrap tyres. Moreover, the applications are not expanding or growing significantly.

7.2.3 Recycling The next step down the hierarchy of use is to recycle the tyre, using it for other purposes after treatment. Fabricated products. The simplest form of recycling is to cut up the used tyre and to use the fabricated pieces for other purposes. Tyres make excellent sandals throughout Africa and Asia, strips are used to provide anti-vibration fasteners for exhaust systems and carcass walls can make excellent snowblower blades. However, as with the creative use of whole tyres, these applications are small in size and limited in growth potential. Size Reduction. A more promising disposal route is to grind the rubber into crumb or powder and to use this as a filler-extender in moulded rubber or plastic products. It has been successfully used in a variety of products ranging from car mats to athletic tracks and highways. The tyres are mechanically shredded into large chips and are then reduced further, either by freezing followed by grinding or granulated in crackermills. Chips or granules of various sizes can be produced. The larger chips – >100 mm – are generally used in civil engineering or landscaping, acting as drainage layers or as part of an aggregate base. If tyres are ground to smaller sizes – around 1 mm – the application range expands again, not only to established markets such as sports surfaces and children’s playgrounds but also to paving blocks, livestock mattresses and roofing materials. According to estimates from the European Tire Recyclers Association (ETRA), in 1995 39% of all recycled tyre rubber ended up in sports surfaces and children’s playgrounds and, while the total volume used in this application has not fallen, the percentage in 2001 was down to 33%, a figure that is expected to decline further to 27% by 2010. New tyres. The most obvious use for filler made from old tyres is to put it back into the material being used to make new tyres. This is done to a limited extent by all manufacturers, substituting perhaps 2-3% of the total compound. Some manufacturers such as Pirelli and Vredestein are pursuing this course energetically, and both talk of quantities up to 10% of the mass being added to the compound as their technology advances. However, other manufacturers are less enthusiastic. The problem is that ground rubber from scrap tyres is chemically different from natural or synthetic rubber. In the grinding process the rubber is broken down mechanically but no chemicallycombined sulphur is removed: the rubber has not been devulcanised. Ground material used as a filler in tyres gives a lower tensile strength, additional build up of heat and oxidative ageing. Goodyear claims that for every 1% of reclaimed rubber used there is an equivalent reduction in tread life. At the same time the rolling resistance of a tyre containing reclaimed rubber is increased, thus resulting in greater fuel consumption. However, Ford and Michelin have announced a joint programme to develop a new car tyre that includes 10% of recycled rubber so they presumably do not see the problems as insuperable. Goodyear too is working on the problem and it has filed a patent for devulcanising rubber chemically.

75

Light Vehicle Tyres

Asphalt. Crumb rubber can be used as a modifier for asphalt, giving it a longer life and a more resilient surface. Most progress on this has been made in the USA as the legislators tried to accelerate the normal market forces. In 1991 the Intermodal Surface Transportation Efficiency Act (ISTEA) mandated that crumb rubber modifier should be used in a proportion of all paved roads. There was a lot of resistance to this and the act was repealed in 1995 but several states – notably California, Texas, Florida and Arizona – persevered with the idea and experimented widely. The experience gained with crumb rubber is far from uniform or consistently positive but the federal government has now funded research into asphalt technology under the Superpave programme. The Scrap Tire Management Council claims that the crumb used in asphalt has risen by 50% since 1994 and the proportion of all crumb rubber going into asphalt has risen from 35% of the total in 1994 to 54% currently. Costing estimates for this material vary considerably with some claiming that it is more than conventional asphalt whilst other organisations maintain that it is 5-10% cheaper. Goodyear, in particular, remains somewhat neutral about its prospects and the company points out that there has been little progress in the last 30 years, but it does see some hope for the future. However, it would seem to be becoming established as a substantial and growing use for scrap tyres. The ultimate responsibility in North America for used tyre disposal lies with the states and provinces, and this could well encourage further development. In Europe, Germany and the UK are the largest users but all countries use some rubber asphalt. A useful additional benefit which is being developed in France by Colas is the use of a rubberised surfacing material to reduce highway noise. With the present emphasis on noise reduction this could be an important factor in encouraging its use. Pyrolysis. This is a process that heats tyres in a kiln up to 1,080 °C in the absence of oxygen. Combustion does not take place because of the lack of oxygen, and instead the tyres decompose chemically. The process yields gas, aromatic oil and steel as well as a high-grade carbon, which can be used as a fuel or as a filter medium to clean dirty water. The tyres are not used as a fuel but as a source of recycled materials, so this is a recycling process rather than a heat recovery process. Typically using this process a tonne of European tyres produce 200 kg of oil and gas, 400 kg of carbon and about 150 kg of steel. The fuel could be used in an adjacent combined heat and power plant. This type of technology would seem to have a future, but it is highly capital intensive and is only suitable for a limited number of locations. The technology works in that energy products can be derived from old tyres but, with the exception of the steel wire, the solid materials generated have little value. Competitive fuels are cheaper, so the economics of tyre pyrolysis are poor. Other methods of disposal are needed to make a significant dent in the annual quantity of used tyres.

7.2.4 Recovery This is the general term for using waste as fuel. It accounts for the majority of waste tyre disposal as it is one of the easiest methods of disposing of tyres and is well within the capabilities of current technology. One major advantage of tyre-derived fuel (TDF) is that it burns much cleaner and hotter than coal and has over 20% more heat value. The main advantage of using tyres in place of coal is that CO2 emissions are reduced by about 20%. In addition TDF results in over 40% less ash at the end of the process. However, there are problems in using tyres in a number of processes, though these are generally being resolved and tyre collection is being improved. Cement kilns. The main disposal method using tyres as fuel is in cement kilns. A big advantage of using tyres in cement kilns is that there is no solid waste disposal. The tyre is completely consumed and becomes part of the final product of the kiln - clinker. This clinker is ground with gypsum and the resulting product is Portland cement. Tests have shown that using scrap tyres as fuel results in harder cement. The wire of the tyre provides one of the raw materials required, iron oxide, and the limestone that is the main raw material neutralises sulphur from the tyres. Kilns can use either preshredded tyres or whole tyres, depending on their design. Whole tyres burn slower than shredded TDF, as well as being cheaper, and this provides a more stable operation for the kiln. Consequently recent developments have allowed whole tyres to be injected into the side of the kiln, usually two or three tyres for each revolution.

76

Light Vehicle Tyres

Internationally, cement kilns are the most important end use for energy recovery in tyres, but the pace of development has varied from country to country. The take-up has been better in countries where there has been a financial incentive to use tyres, as in Japan, Germany and to a lesser extent in the USA. However, tighter regulations on gaseous emissions have delayed the approvals in a number of countries and in some cases, where the kilns are of older design, kilns have reverted to burning conventional fuels. Environmental legislation is likely to play an increasingly important role in this area because of the fumes given off during the process. The EU’s incineration directive, one of three bodies of European legislation which will have a future impact on scrap tyre management and disposal, will have the effect of forbidding older cement plants from burning tyres from 2008. However, the industry itself is keen to use tyres as fuel and new investment will gradually convert many existing plants to enable tyres to be used. Paper and Pulp Plants. Another industry that can use tyres as fuel is the paper industry. A significant proportion of the US State of Oregon’s scrap tyres are used to feed the paper plants in the state, helped by a disposal tax of $1 for each used tyre. Not only has this taken much of the ongoing waste, it has also largely eliminated the backlog of tyres which had accumulated over the years. Electricity Generation. Tyres are being used as a supplementary fuel in a wide variety of generating stations in the USA, some taking whole tyres, others requiring shredded TDF. There have been experiments with dedicated tyre-only plants, two in the USA, and one in the UK, at Wolverhampton. However, although these plants can consume large volumes of tyres, they are not as economic as conventional coal or gas fire plants and they require some form of subsidy.

7.2.5 Landfill At the base of the hierarchy of waste is landfill, the disposal method used almost universally until recently and still the method which accounts for most used tyres. However, this will not be for much longer. The EU has already banned the landfill of whole tyres and will ban shredded tyres from 2006 whilst in North America similar measures are being taken on a piecemeal basis with the individual states and provinces enacting legislation. 7.3 Regional Solutions

7.3.1 North America In the USA and in Canada the individual states/provinces set the laws and regulations for the disposal of scrap tyres, but they act within a general framework of policy set by government. Nevertheless, there are wide discrepancies in the regulations set by the individual states. In general those states with more land area tend to be more lax in their requirements, but California has imposed a very strict regime, and states such as Colorado have imposed tight conditions on emissions into the air. Until very recently the majority of tyres were not even buried – they were stored in giant stockpiles in areas that were out of sight of main highways. However, shaken by the publicity from a number of major fires in these stockpiles, the industry, encouraged by national and state laws, has made strenuous efforts to reduce landfill and to make considerable inroads into the existing stocks over the last decade. Based on a survey of state agencies, the Rubber Manufacturers Association estimated that the national stockpile of scrap tyres amounted to about 300 million tyres in 2003, a dramatic decline from 1 billion in 1990. In the last five years all three major markets for scrap tyres have expanded, and the overall recovery rate has risen to just under 80%. (This is a calculation comparing the number of new tyres sold in a year with the number reused, recovered or recycled into an end product in the same year.)

77

Light Vehicle Tyres

The three main markets for used tyres are tyre-derived fuel (TDF), ground rubber and civil engineering applications (Table 7.2). The biggest usage is for TDF but this is growing only slowly and is dependent upon the economy. If demand falls for cement or pulp & paper the demand for TDF also falls. In contrast the markets for ground rubber and engineering applications are both growing rapidly and are less susceptible to variations in the economy. TDF uses about 120m tyres whilst ground rubber and engineering applications are both much smaller, taking 35m and 40m tyres respectively. Material application Tyre derived fuel Civil engineering Ground rubber Landfill Export Punched/stamped Miscellaneous Unknown Total Source: STMC

Table 7.2 Scrap tyre utilisation in USA in 2001 % 40.9 14.2 11.7 10.0 5.3 2.8 2.6 12.5 100.0

7.3.2 Europe At the European level, there are currently various systems for organising and funding the collection and processing of non-reusable end-of-life tyres: Tax-based system The producers pay a tax to the government. The state is responsible for organising the system and pays the recycling operators. Operating in Hungary, Denmark and Slovakia. System with producer responsibility A decree makes the producers responsible for the processing of end-of-life tyres (ELT) and they pay into a fund in proportion to their sales. This fund finances ELT processing. This system is now in place in Sweden, Norway, Finland, Portugal, Poland, France and soon, the United Kingdom, Spain and Hungary. Free-market system The distributor deals with the recycler of their choice as in Germany and Italy. Producer responsibility appears to be the most practical system as the majority of countries have decided to move towards this method. In France, for example, seven tyre firms – Groupe Michelin and its Kleber unit, Bridgestone/Firestone, Goodyear and its Dunlop operation, Continental AG, and Pirelli Group – will coordinate collective recycling efforts through Aliapur, a trade association they formed in January 2002. Under the law, each tyre producer must pay annually for the collection and recycling of a weight of tyres equal to the weight of tyres it sold in France that year. Aliapur estimates the per-tyre cost at 65 cents to $1.63, depending on tyre size. Vehicle makers are responsible for tyres fitted on new cars – including imported tyres – while the tyre manufacturers must pay for replacement tyres. This money is then used to fund a collection scheme and, where necessary, a subsidy to the end user such as cement kilns which often claim that using tyres reduces the capacity of the kiln. Pan-European statistics are now collected by the trade organisation, working with governments, but the organisation is only in the early stages and the figures are not yet very reliable (Table 7.3). In particular, individual countries cannot be compared with each other. However, they do demonstrate the general level of waste recovery and the main end-uses for scrap tyres. As the systems in each country become more established the recovery rate should rise and the reporting should become more accurate.

78

Light Vehicle Tyres

Table 7.3 Used tyre disposal in Europe – 2001

Belgium Denmark Finland France Germany (capacity) Greece Italy Netherlands Portugal Spain Sweden United Kingdom Hungary Poland EU Source: BLIC

Tyre arisings (000 tonnes) 72 41 32 401

Overall recovery rate (%)

Reuse (%)

Retreading (%)

Material recycling (%)

Energy recovery (%)

Export (%)

Landfill (%)

63 100 100 53

5 0 0 10

4 3 3 15

34 97 97 18

14 0 0 10

6 0 0 0

0 0 0 47

582

96

4

13.5

16.5

46

16

4

Not 388 32 52 280 62

available 59 100 90 25 100

4 0 4.5 0 5

13 0 41 13.5 5

15 10 29 1.5 55

25 0 15.5 7 24

2 90 0 3 11

41 0 10 75 0

435

74

12

17

26

17

2

26

40 135 2552

63 31

0 0

13 12

10 8

27 10

13 1

37 69

Stored waiting for recovery 37

7.3.3 Asia Only Japan and South Korea have so far brought in schemes for the disposal of scrap tyres but other countries are beginning to take note of the problem and will have to start developing practical schemes in the near future. In Japan the estimated total of scrap tyres amounted to 107m in 2001, up 47% from the figure of 73m in 1986. In order to finance a disposal scheme the government has imposed a tax on the disposal of tyres of ¥250 per tyre ($2.28) paid to the tyre shops when buying replacements. Collection companies are given licences to collect and they arrange disposal, using the money from the tax to pay incentives to certain industries such as cement kilns, but receiving payment from such sources as tyre retreaders and rubber crumb plants. In 2001, 78% of all tyres were disposed of either by re-use (17%) or by burning for heat recovery (61%), the balance being exported or landfilled. The proportion of tyres recycled in some form has not changed dramatically in the last fifteen years, but the disposal routes within that total have changed quite markedly. In 1986 42% of all tyres were re-used whereas by 2001 that proportion fell to 17%. Conversely the use of tyres for recovering energy rose from 34% in 1986 to 61% in 2001, mainly because of increased use in cement kilns and the start of usage in the steel manufacturing industry in 1999. As energy recovery is lower down the hierarchy of alternatives, it could be argued that Japan has slipped back in its environmental programme. In Korea the policy and practice are evolving, rather than being firmly established. As in Japan, a tax on new tyres pays for collection and disposal. The tax is 500 won (61 cents) for a truck tyre and 150 won (19 cents) for a passenger car. Even bicycle owners are not exempt – they have to pay the equivalent of 6 cents. The tyre manufacturers pay this tax to the trade association, and in turn the association pays the tyre collection companies – a total of 22 licensed companies nationwide. Some payments are received from the end users as a further contribution towards costs.

7.3.4 Developing Countries Unsurprisingly, statistics on tyre disposal in developing countries are notable by their absence. However, a study by Modi Rubber demonstrates that recycling is very important in India and, by implication, in many other countries. In India the reclamation of tyre materials employs about

79

Light Vehicle Tyres

250,000 people and generates a value of $375 m. About 90% of the material is reclaimed for use in a wide variety of products – retreads, shoe soles, fabric ropes, animal harness and wire cages. Most of the remainder is used as fuel in village industries or brick kilns. Other countries have a weaker infrastructure for recycling tyres but they too are becoming more aware of the problem and are approaching it in ways similar to the developed countries. South Africa, for example, has an estimated stockpile of 800 million waste tyres; a considerable achievement for a country that produces only 12 million tyres per annum. Currently most of these tyres are either burned in the open air or retreaded. The former method releases styrene and butadiene, both known human carcinogens, into the atmosphere along with thick black smoke and other chemicals. The South African government recognises that this is not a satisfactory response to the growing problem and is intending to make it mandatory that tyre manufacturers recycle their rubber products. The recycling initiative is estimated to be about to create some 800 jobs in recycling and collection. With only one recycling plant in the country there is a shortage of recycling facilities and the government is in discussions with various companies with a view to establishing further recycling plants. One of the prospective end products is the use of tyre rubber in asphalt. Unfortunately one of the problems for any investor in recycling in South Africa is the lower volumes experienced in the business compared to Europe or the USA. These lower volumes push up costs and make the already marginal operations less cost effective still. The government's aim is to drive the tyre manufacturers to provide the recycling facilities, one way or another, and to ensure proper disposal of their products. The government will impose a one percent tariff on the sale of every tyre, this will be used to fund the collection and disposal through the South African Tire Recycling Process Company, a non-profit organisation that will collect waste tyres and deliver them to recycling points. The disposal of scrap tyres is a universal problem and those countries with the biggest problem (the developed economies) are now beginning to address it in a systematic way. There have been a number of false starts and misguided legislation but these have mainly been recognised and corrected. However, only a minority of tyres are being disposed of by reuse or recycling – the majority are used for heat recovery, a relatively wasteful method of disposal. In addition, most countries have only a vague idea of what happens to scrap tyres – the figures produced are largely estimates. Considerable progress has been made in the last decade but the world is only now beginning to take the problem seriously.

80

Light Vehicle Tyres

8 North American Market 8.1 Introduction Of the three main regions for the tyre industry – Europe, North America and Asia – North America is the largest, but the other two are catching up quickly. Asia in particular is growing rapidly as a tyre market. However, politically and economically the three regions are very distinct. North America is by far the most homogeneous of the three which makes it much easier for the major manufacturers to treat it as a single entity rather than as a group of disparate countries. The region is dominated by the USA which accounts for 85% of the economic activity. Canada is a much smaller neighbour but there is free trade between the two and the federal structure of them both emphasises the similarities between them. Mexico is a relative newcomer to the group but there has been free trade between the countries since the NAFTA agreement was signed in 1992 and border restrictions are gradually loosening. Table 8.1 gives an indication of the relative sizes of the three countries comprising the North American market. Table 8.1 North American market 2004 Population USA Canada Mexico Total Source: CIA Fact Book

million 293 33 105 431

% 68 8 24 100

GDP (at purchasing power parity) $ billion % 10980 85 957 8 942 7 12879 100

Because of the relative poverty in Mexico that country only accounts for about 5% of the tyre market, compared with 10% in Canada and 85% in the USA. Not only is North America the largest world market, it was also the earliest one to develop. Despite the automobile being first developed in Europe, it was in the USA that large-scale production and sales first took hold. In the first half of the twentieth century three-quarters of all vehicles were located in the USA, and even as late as 1980 the US accounted for almost half of the world vehicle parc. In those circumstances it was little wonder that the US tyre manufacturers grew quickly and dominated the world industry. Goodyear was the largest in the world by the 1920s, and Firestone, Goodyear and Uniroyal all established extensive foreign interests. However, the US companies made a big mistake when the radial tyre was introduced in the 1950s. Although they recognised that the tyre was technically superior to the existing cross-ply tyres they refused to adopt it at first because of the heavy investment required in new equipment. A decade later they were forced to make the change but by then their competitors had caught up and in terms of both technical advances and profitability, were world leaders in their own right. As a result, when the restructuring of the industry took place in the 1980s, a succession of well-known names was taken over by overseas companies. A bid for Goodyear by a financial consortium in 1986 failed, but it did indicate to other companies that US manufacturers could be acquired. In 1987 Continental acquired General Tire, and the following year Bridgestone successfully bid for Firestone. Michelin and Pirelli, both wanting a stake in the world’s largest tyre market, followed this with Michelin buying Uniroyal-Goodrich and Pirelli buying Armstrong. Even Yokohama decided it needed a foothold in America and it bought the much smaller Mohawk Tire. At the time this change in control appeared to be traumatic for the whole US industry, but in the event it proved to be far more of a turning point for the companies involved than for the industry in the USA. The companies at first retained the names, the factories and the distribution networks of the companies they had taken over. However, the poor market of the early 1990s led most into losses, and this resulted in major changes in working practices. None wanted to be first in making

81

Light Vehicle Tyres

these changes, but eventually Bridgestone led the way because of the enormous losses it was making. It had built up losses of US$1 billion between 1990 and 1993 because of restructuring costs and new investment, and it was determined to cut costs and to push through efficiency improvements. It refused to agree a new contract with the United Rubber Workers union, and several plants were shut down in a bitter and protracted strike between 1994 and 1995. Although this left a legacy of bitterness in the industry and led directly to the United Rubber Workers being subsumed into the steelworkers’ union, it proved to be seminal in bringing about change in the North American industry. Bridgestone eventually achieved its aims, and in 1993 it broke into profit, building on this year by year until by 1998 and 1999 the Firestone subsidiary was the biggest single profit earner in the company. Because North America is such a large market some of the subsidiaries are very important to their parents. Bridgestone-Firestone and Michelin North America in particular are very large organisations which operate with a considerable degree of autonomy. However, the companies which bought the smaller operations have had continual difficulties with these subsidiaries. Continental with General, Pirelli with Armstrong and Yokohama with Mohawk have all struggled to make consistent profits and the subsidiaries are still only minor players in the market. A seismic shift occurred in the market on August 9th 2000 when Firestone was forced to recall 6.5m tyres, the equivalent of the annual output of a medium-sized factory. Whatever the merits of its case, Firestone appeared to handle things badly by first protesting its innocence, getting into a public argument with Ford, and then refusing to go along with a further recall requested by the National Highway Traffic Safety Administration (NHTSA). All this had a dramatic effect on Firestone’s growth and profitability. The parent company stopped publishing separate results for its Firestone subsidiary, but there is no doubt that the stream of bad publicity has had a major adverse impact on earnings. The cost to profits has been enormous with write downs, loss of sales and legal costs amounting to much more than the profits made in 1998 and 1999. At one point the parent company, Bridgestone, lost 60% of its market value. The effect on sales was dramatic in North America, as OE sales by Firestone were badly affected and many aftermarket customers were put off by the bad publicity. This was a unique opportunity for its rivals to expand their market share but most of them fluffed the chance. Goodyear in particular disrupted its production programme in the effort to make more of the withdrawn sizes and had great difficulty delivering tyres to its distributors in economic lots. The other companies proved equally inflexible and at the same time Firestone fought back brilliantly with excellent dealer programmes and well-targeted advertising and public relations with its customer base. There may not have been much change in market shares between the companies but the politicians and lawyers have changed the nature of the market dramatically. The publicity about the recall has raised the level of knowledge about tyres and related subjects such as inflation and tyre care to new levels and this has helped in the sale of replacement tyres. Even more important, the TREAD Act has consolidated this new level of awareness into goods and services provided to the tyre-buying market and provided a firm base of awareness amongst users. The market is much better informed now than it was even three years ago and this should benefit the whole industry. 8.2 Market The North American market is a magnet to any tyre supplier with international aspirations despite the competition in this market and the harsh penalties for those companies that do not succeed (Table 8.2). This is not just because of its sheer size, but also because of the credibility that a position in this market gives to any supplier. Once a company has a credible presence in the North American tyre market, it is no longer a French supplier or a Japanese supplier, but a global one.

82

Light Vehicle Tyres

Table 8.2 North America car tyre market 2003 World North America Quantity (m) Quantity (m) OE 280 80 Replacement 715 250 Total 995 330 Source: Bowfell Associates & industry

% 29 35 33

The three countries, Canada, Mexico and the USA, account for almost one third of the world demand for OE tyres and well over one third of the demand for replacement tyres. However, growth in this market has been relatively slow in volume terms, and lower still in value terms. Growth was steady throughout the 1990s, but turned negative in 2001 and 2002, before resuming progress in 2003. The relative size of the North American market is being whittled away gradually by faster growing markets elsewhere, particularly in Asia, but it will retain its importance for many years, not least because of its homogeneity. There are, of course, regional differences between the three countries and between regions in those countries but they are relatively minor – the area is essentially one single market. Growth for the OE sector is estimated at 0.34% pa for the next five years and the replacement sector is forecast to grow at an average of 2% pa over the same period. The OE market is, of course, dependent upon the output of the vehicle manufacturers which in turn varies with the economy. In recent years this has been at a high level as the market has been buoyant although the home-based manufacturers – GM, Ford and Chrysler – have been losing share to foreign manufacturers, particularly the Japanese. However, this has not resulted in an increase in imports as the foreign manufacturers have established assembly plants of their own in the region. Consequently the demand for OE tyres has remained stable within the region; they have not been replaced by imports. Nevertheless, the composition of the OE market is changing and this in turn is changing the product balance in the replacement market. Increasingly heavier vehicle platforms and more powerful engines are emerging from one generation to the next. These vehicles require larger wheels to bear the load and, more importantly, larger braking systems. Consequently the average tyre size is moving steadily upwards. 14" and 15" wheels are being phased out and 17" and 18" wheels are increasingly common. The standard size is still 16" but this shows signs of declining. The move towards SUVs is also accelerating this trend. The tyres for these vehicles are still classed as light vehicle tyres but they are larger and heavier than passenger car tyres. At first light truck tyres were used but with the increasing popularity of SUVs, specialist tyres were designed for them to give the vehicle a more comfortable ride. The other trend in the North American tyre market is also linked with the move towards more powerful vehicles. Tyres for the mass market still predominate but there is a steady growth, not just in SUV tyres as already described but also in high performance and ultra-high performance tyres. These now take 17% of the market whilst mass market tyres account for only just over half (Table 8.3). Table 8.3 North American market by tyre type 2003 Quantity (m) Mass market 172 SUV 79 Light truck 23 High performance ‘H’ 36 UHP ‘V’ & ‘Z’ 20 Total 330 Source: Bowfell and industry

% 52 24 7 11 6 100

83

Light Vehicle Tyres

8.3 Supply Structure A total of 65 plants supply the North American market, the majority being in the USA (Table 8.4). These include some of the largest scale plants in the world such as the Goodyear plant at Lawton, Oklahoma, capable of producing 61,000 tyres each day, and the Kelly-Springfield plant at Fayetteville, North Carolina, which is slightly smaller (60,000 units). However, the newer factories in North America are small, specialist facilities such as the Pirelli plant in Rome, Georgia using the company’s new MIRS manufacturing technology. Table 8.4 Tyre manufacturing plants in North America 2004 Canada Mexico USA Bridgestone/Firestone 1 2 8 Goodyear 3 11 Michelin 4 1 10 Continental 1 4 Pirelli 1 Cooper 4 Others 3 12 Total 8 7 50 Source: Tire Business - Global tyre report

Total 11 14 15 5 1 4 15 65

The big three companies – Bridgestone, Goodyear and Michelin – dominate North American production with 40 of the 65 plants, 62% of the total in terms of numbers, but about 70% in terms of capacity. Steady changes have been taking place in the last decade, with older and less efficient plants being shut down and new investment applied both to existing plants and to building greenfield factories, particularly in the southern states of the USA, which had a tradition of nonunionised labour. At the time of the signing of the NAFTA treaty in 1992 it was thought that much of the tyre manufacturing would migrate south to Mexico, but this has not worked out as forecast. All the major manufacturers had plants in Mexico, and they tried first to integrate these plants into overall production plans for the region. However, labour rates in the Mexican plants are very high, and the productivity could not justify these high rates. The Mexican rubber trade association confirms that ‘our productivity is low when comparing it with high technology producers in other countries or with countries like Brazil where the labour force is not subject to obsolete regulations like the ones we have in Mexico.’ After trying for several years Goodyear has closed its factory and Michelin has closed one factory and leased another to a local manufacturer. It then opened a nonunion plant in Queretaro, after closing its unionised facility at the same location in August 2000. There are also closures in the USA with Goodyear closing two plants as part of a major cost-cutting drive and cutting output at some others. Also, in June 2004, Continental announced the termination of production at its Mayfield plant although for the time being it will continue compounding there. There is also a move offshore for the more standard tyres, concentrating North American production on higher quality tyres. Cooper Tire & Rubber Co. is moving its production of radial medium truck tyres to China and converting the truck tyre manufacturing space at its Albany, Ga., plant to performance passenger tyres and specialty light truck tyres. However, there are moves in the other direction. In the same month as Conti’s announcement, Toyo Tire & Rubber Co. Ltd. chose Bartow County, Georgia, as the site of its new North American tyre manufacturing plant. Total capacity is roughly in line with market demand but the North American market, like other regional markets, is not self-sufficient. About a quarter of the demand is satisfied by imports, partly from companies in Korea, India and China but mainly by the big international companies bringing in tyres from their plants elsewhere in the world to boost supplies of certain sizes on a temporary basis and to satisfy niche markets. If imports from Canada and Mexico are discounted as ‘captive’ imports – i.e., from subsidiary companies of US-based tyre makers – then ‘off-shore’ imports accounted for slightly more than 20% of the US replacement market in 2002. However, the USbased companies also initiate many of these ‘off-shore’ imports. The main importers, apart from

84

Light Vehicle Tyres

the multinationals, are Kumho, Hankook and Sumitomo as well as a consortium of Chinese manufacturers which have combined their resources in a single marketing operation, China Manufacturers Alliance. Goodyear is the leader in the US/Canadian OE light vehicle tyre market (Table 8.5), but Firestone takes that position in Mexico. Until the Firestone recall and the subsequent falling out with Ford, Bridgestone/Firestone was challenging Goodyear as the leading OE supplier. The decision to stop supplying Ford led to a fall in market share but Bridgestone/Firestone is still in second place overall, as Michelin has walked away from bidding for unprofitable contracts, a similar policy that it has now adopted elsewhere in the world. Continental makes a respectable showing because of its General brand. Table 8.5 Market share in North America 2003 OE % Replacement % Goodyear 32 26 Bridgestone/Firestone 27 16 Michelin 23 22 Continental 13 6 Pirelli 1 2 Others 3 28 Source: Bowfell & industry Both Goodyear and Firestone have strong equity chains selling their products as well as a strong independent network and this has helped them maintain a good share of the replacement market though both have run into difficulties recently. The Firestone recall dealt a body blow to the company but it is now recovering its share. At the same time Goodyear has tried to incorporate the Dunlop brand into its portfolio and this has caused problems with its distributors. Michelin has been able to take advantage of these mistakes by its rivals and has strengthened its own network and increased its market share at their expense. Continental and Pirelli are relatively minor players in North America but they are following two different strategies. Continental bought a mediocre brand when it acquired General Tire but it has used the company to develop the Continental brand at great expense but with some success. Pirelli had the same perception problem with its own acquisition of Armstrong Tire and it has spent a lot of money trying to move the brand upmarket. It has now given up the fight and is concentrating on the Pirelli brand, retaining a small manufacturing capability in the USA but importing most of its high performance tyres from Europe. Cooper, an independent American manufacturer, ranking 8th in size in the world, is more important in North America than either Continental or Pirelli. It has 6% of the replacement market and it is also a major supplier of private brands but, as a matter of policy, it does not supply the OE market. There are three broad groups of brands in the North American market – flag brands, associate brands and private brands – and the major manufacturers are associated with all three. Flag brands are the main advertised brands, and these are the ones that receive the advertising support. The same company makes associate brands, but they receive far less support and are sold at a lower price through the normal distribution channels. Some of these such as Goodyear’s Kelly brand are very large indeed. Until recently Kelly was a separate division within Goodyear, and even now some of the factories are totally dedicated to manufacturing Kelly brand tyres. Others are much smaller and may not have regular distribution channels but are only used occasionally such as the ‘fighting brands’. These can be introduced to a particular area at a very low price in order to combat a threat posed by competitive activity. Although some of these names are recognised in Europe, the majority are used just in the North American market. Private brands are made for a specific company and sold only through that company’s outlets. These range from large retailers such as Sears Roebuck and Wal-Mart to oil companies such as

85

Light Vehicle Tyres

Shell, but many of them are specialist tyre retailers large enough to justify their own brand. In the 1970s and 1980s these private brands grew vigorously and were eroding the market share of the lesser brands used by the manufacturers. However, in the last decade the market balance has altered as the majors have fought back much more aggressively with their own associate brands. The share of private brands has dropped substantially since 1991 as manufacturers have reduced minimum order requirements, reduced the price of house brands, and consolidated their operations, thus reducing excess capacity (Table 8.6). Table 8.6 Tyre market by brand type 2003 Passenger tyre % Flag brands 57 Associate brands 18 Private brands 25 Source: Modern Tire Dealer & Tire Business

Light truck % 61 16 23

8.4 Retailing The distribution of tyres has been undergoing a fundamental change, with the emphasis moving away from independent tyre specialists and towards chains and mass merchandisers. This is the result of a change in consumer behaviour over time. As a general statement, consumers are now looking for selection (price and brand), fast service, convenience (location and hours), and credit availability. Goodyear has conducted surveys over the last decade that place consumers into three broad categories. ‘Time poor’ consumers nearly doubled from 27% to 51%, whilst the number of pure ‘price’ buyers declined from 48% to 39%. The proportion of consumers having a definite preference for certain types of outlet gained in importance from 26% of the sample to 35%. Firestone has a similar view of the market, dividing consumers into four groups: • • • •

Brand conscious – about 26%, increasing slightly. These customers would specify the main flag brands such as Bridgestone or Firestone. Value customer – about 27% and rising. Customers who would prefer an associate brand such as Gillette or Road King. Store reliant – 24% and stable. Would rely on store recommendation. Price conscious – about 22%, declining. Looking for the cheapest suitable product.

However, since the Firestone recall and the publicity about tyre failures there has been a significant swing towards top class brand names and specialist tyre dealers. This may not be permanent but the continuing publicity and emphasis on safety could change the shape of the market in the longer term. This change in consumer preferences has led to a dramatic shift in the channels of distribution (Table 8.7). There has been a rise in the importance of tyre discount chains and of warehouse clubs, and an upheaval in the position of mass merchandisers. At the same time, the role of service stations has declined and so too has the small independent dealer, but several large regional dealers have emerged, taking in many of the independents. Less time is spent shopping, and as a direct result of this, retailer attributes such as image, speed and convenience are gaining importance at the expense of price. Moreover, whereas tyres have traditionally been a distress purchase, the emphasis on safety and the application of regulations with regard to tyre condition and tread depth have led to an increased willingness to purchase tyres at an earlier stage and to take advice from dealers.

86

Light Vehicle Tyres

Table 8.7 Light vehicle tyre sales by outlet 2003 Passenger car tyre % Light truck tyre % National dealers 19 21 Regional dealers 3 6 Local dealers 44 52 Equity chains 10 8 General merchandise 19 10 Other 5 3 Source: Tire Business & Modern Tire Dealer National dealers are independent companies with more than 40 outlets in three or more regions. The large independent tyre chains are growing rapidly. These have a mixed profile of customers, depending upon the marketing stance of the individual chain. The reason they are doing well is that an entrepreneur, who is both sensitive and responsive to the market, usually controls them. The staff have a good product knowledge, the production selection is wide, location is usually convenient, hours are flexible, and there is normally a positive price perception by the customer. There is a strong move towards larger businesses in this area. In 2003 TBC Corp. bought 337 outlets for its Tire Kingdom Inc. subsidiary through two separate deals – a $57.5 million buyout of 112 Merchant’s Inc. locations and $260 million for 225 of Sears, Roebuck and Co.’s National Tire & Battery (NTB) stores. TBC said it also plans to add as many as 500 Tire Kingdom outlets independent of these acquisitions in three to five years. Two other very large chains, Discount Tire and Les Schwab, also added stores to their total number in the last two years. Despite its size Schwab earned J.D. Power and Associates’ top tyre retailer satisfaction rating for the fourth consecutive year in 2003, being rated by customers as delivering service ‘substantially above expectations.’ The typical retail tyre outlet operated by one of North America’s 100 largest dealerships employs 13, contains 7.5 service bays, carries 7.5 tyre brands and generates $1.81 million in sales, split 55/41 between tyres and automotive service. Regional dealers are independent companies with more than ten outlets in at least two regions. There are about 100 dealerships with 10 or more stores, including 52 with 20 or more. Local dealers are independents with fewer than ten outlets in a single regional distribution area. The small independents appear to be a dying breed, even though single outlets still account for 25% of tyre sales. In total there are about 15-20,000. The large tyre chains are buying many of them out or they are affiliating with manufacturer-owned chains. Their strength is that they can offer a very personalised service, but against that they are slow to react to changing consumer needs such as fast service, convenient hours and accessible locations. Equity chains are outlets owned by a manufacturer but using various names and store formats. Manufacturer outlets comprise about 8% of the total market, and this proportion has declined steadily for some years. Bridgestone has by far the most wholly owned outlets, with about 1,550 in total. Most of these trade under the name Firestone Tire and Service Center, but other names include Expert Tire, Mark Morris and Tire Station. Bridgestone believes that these stores represent a significant competitive advantage. Goodyear has about 750 company-owned dealers. 700 of these trade as Goodyear Certified Auto Centers and most of the remainder are ‘Just Tires’. Of the five largest manufacturers or marketers of tyres, only Cooper, which formed a marketing alliance with Pirelli Tire North America last year, does not own its own stores. These company stores attract conservative, comfortable buyers who want to buy a well-known brand. The strengths of this type of outlet are in-depth product knowledge and a service offering complete car care. The weaknesses are that there is a perception of these stores being high priced, and they inevitably have a single brand focus. It is interesting that the manufacturers have made little attempt to introduce the type of equity chain they own in Europe, where the name is not associated with the manufacturer, competing brands are sold and the service is limited to tyres and a few simple services.

87

Light Vehicle Tyres

General merchandise distributors are mass merchandisers, wholesale clubs and similar organisations. Mass merchandisers were very important, but they were slow to react to changing retail demands and are only now coming back into their own with about 16% of the market, a share that has stagnated. These outlets appeal particularly to loyal customers of the merchandise store and also to bargain hunters. They are invariably well located, they have a good selection of products, flexible hours and generally there is a positive price perception. Offsetting these strengths, the main weakness is the calibre of personnel employed there, with limited product knowledge and giving insufficient guidance to the customer. The merchandiser who epitomised this approach is Sears Roebuck, which was probably the biggest single private brand buyer in North America. However, it has had problems with its service operations and is concentrating more on retailing. It split its automotive group into two distinct divisions, one focusing on tyres which it has now sold, and the other on service and parts. However, Wal-Mart has the largest number of outlets of any of the mass merchandisers. Warehouse clubs are still relatively small with 9% of the market but have continued to grow a little. These clubs have become significant players in tyre retailing, even though they operate only about 743 units. They do not have the width of choice or provide advice, and there is only limited credit availability. The main strength is that they offer major brands at low prices. Autoparts stores also appeal to bargain hunters. They are open for long hours and attract store traffic, but the staff have very little product knowledge and there is little choice. The major clubs are trying to improve their reputation. Costco has joined Sam's Club and BJ's, in instituting a special order program. With tyre sizes multiplying, clubs can stock only a fraction of the special sizes and speed ratings needed. The three retailers are also adding tyre salesrooms to new and existing clubs, which means customers no longer have to carry tyres from racks in the back of clubs through the register for payment, then back to the tyre shop for mounting and balancing. Costco and Sam's lead the industry with lowcost, $7 and $7.50 per tyre charges for mounting, balancing, replacing valve stems and providing road hazard coverage. Other outlets include service stations, garages and car dealerships. Service stations now account for only about 4% of the tyre market and even this proportion is falling. Their strengths are that there is a loyal customer base, but it is ageing, they are frequently used for emergency purchases and consequently they are not price sensitive. Against that, product knowledge is poor, selection of products is limited and the market coverage is sporadic. These will probably continue to decline as service stations concentrate on fuel and convenience sales rather than any car maintenance operations. Car dealerships are continuing to expand efforts to become tyre dealers as well. Following in the footsteps of Ford Motor Co., General Motors Corp. and others, DaimlerChrysler Motors Co. L.L.C. introduced in 2003 what it dubbed ‘Mopar T.I.R.E. Works,’ a tyre supply program for Chrysler Group vehicle dealers. There is little sign yet that Internet trading will take much business from traditional outlets. According to the 2003 Replacement Tire Buyer Behavior and Satisfaction Survey by J.D. Power and Associates, few vehicles owners use the Internet to buy tyres, opting instead to talk to a salesperson about their tyre needs. The satisfaction study found that more than 60% of tyre buyers access the Internet, but only 16% of them use it when they need to buy tyres. According to the report ‘The desire to discuss their needs with a tyre salesperson and their intentions to buy from the same retailer are key reasons tyre buyers do not use the Internet as a tyre shopping tool today,’

88

Light Vehicle Tyres

9 European Market 9.1 Introduction Europe is second only to North America in importance for the tyre industry, but it is a very different market. It has always been a much more fragmented market, comprising more than forty different (and sovereign) countries as well as having a sharp dividing line down its centre separating capitalist and communist economies. These divisions are rapidly fading but it is also a very different market for tyre products, requiring a very different mix between high performance and mass market tyres as well as between winter and summer tyres because of the different driving infrastructure and different attitudes to driving. For many years Western Europe was conventionally defined as the European Union (EU) plus Norway and Switzerland. Eastern Europe – or Central Europe as it is more frequently referred to now – consisted of the countries of the old Comecon organisation. Even so, there were marked differences between those countries on the border of Western Europe – Poland, the Czech Republic and Hungary – and the other countries such as Romania and Bulgaria. Finally Russia was a single entity, part in and part out of Europe, and very different from everywhere. The break up of the Soviet Union in 1989 and 1990 changed this structure radically. The countries bordering Western Europe are now members of the EU and are rapidly being integrated into the economy of the west. Other countries, notably Bulgaria and Romania, will follow, but Russia and the countries that formed the old Soviet Union have remained outside this process. Although no longer communist, they remain largely autocratic and have the legacy of centrally planned economies. The multinational tyre companies have been well ahead of the politicians; first by treating Western Europe as much more of a single entity and then, since 1990, they have been gradually bringing the nearer parts of Eastern Europe into the same organisational structure. The US companies, Goodyear and Firestone, were the first to consider Western Europe as a single entity. Although they still had to work with national boundaries, they began strategic planning on a pan European level in the 1970s, long before the European based companies – Michelin, Dunlop, Pirelli and Continental, began to take the EU seriously. Extending this strategy into Eastern Europe when conditions allowed was a logical development and most of the large companies were alert to developments in that area after 1990. Sumitomo and Continental were the first to make moves into the former communist states, buying manufacturers in East Germany and the Czech Republic respectively. Both Goodyear and Michelin followed this by buying control of companies in Poland. Michelin went on to buy Taurus in Hungary, and Goodyear completed the process when it acquired Sava of Slovenia in early 1998. It seemed that Bridgestone had missed out on the opportunity of establishing a bridgehead in Eastern Europe, particularly when discussions it was holding with Matador of Slovakia broke down. However, in mid 1998 it announced a joint venture with Stomil Poznan in Poland to produce radial tyres for cars and light trucks. Since then there has been a lot of investment in these plants and those operations which began as joint ventures have now largely been completely bought out by the international partner. Michelin has bought out its litigious coshareholders in Stomil Olsztyn and Goodyear bought the remaining part of Sava Tires in Slovenia in 2004. As a result of these acquisitions there is only one independent producer of tyres in central Europe, Matador, and that company has been developing close links with Continental in the form of joint ventures and offtake agreements. There are a few tyre manufacturers in former Yugoslavia which have remained independent because of the political situation there but these too are in talks with major companies and they will probably be bought out or shut down in the near future. One or two brave companies are venturing further afield and Continental has built a greenfield facility in Romania whilst Michelin has purchased two factories in that country from the Tofa Group in the expectation that Romania will become more integrated with the EU in anticipation of eventually joining.

89

Light Vehicle Tyres

The factories in Eastern Europe have now been integrated into the wider European production network of each company and form part of their overall strategy for the region, particularly with the accession of ten new countries into the EU in May 2004. The strategy for all the multinationals has been to establish a manufacturing presence in central Europe for three purposes: • • •

To provide a low cost supply point for western markets. To establish a presence in developing countries that are likely to grow rapidly. To act as a bridgehead for penetration into Eastern Europe and Russia.

They have all achieved this objective, though some with more enthusiasm than others. Continental, in particular, has placed great emphasis on building up production in lower labour cost countries, particularly Portugal, the Czech Republic and Slovakia. The new plant in Romania now means that more than 50% of its production is in these areas, a target it set itself in 1995 when it realised that its German base made it the highest cost producer of all major manufacturers. In contrast, Goodyear still classes its east European operations as part of the ‘Eastern Europe, Africa and Middle East Region’. Russia, however, together with the Ukraine and Belarus, has remained largely a no-go area for western companies until very recently. They preferred to remain on the outside looking in as the commercial environment was judged just too unstable for secure investment. It is still a very volatile environment but it represents a large and underdeveloped market so the attraction remains. Most companies have established small representative offices in Moscow handling imports and trying to understand the commercial environment but few have taken the plunge and invested in the country. The first to do so was Matador of Slovakia which set up a joint venture in Omsk but this was the sole outside involvement until Continental bought an interest in Moscow Tire. Soon afterwards Nokian came to an agreement with Amtel, a major Russian holding company, but that soon ended in tears with both sides claiming the other had not lived up to the agreement. Michelin has now decided that the market is worth the risk and has built a greenfield factory at Davydovo, near Moscow, which is now in trial production and should be running at planned production by 2005. As a result of this dichotomy this chapter looks at Europe as a single entity except for Russia which is reviewed separately. It is geographically part of Europe but it will be many years before its economy is closely integrated with the rest of the continent. 9.2 Market Despite its apparent fragmentation into more than forty countries the European market is vital to any manufacturer claiming to be a world supplier. It is, in total, a very large market and also probably the most sophisticated and demanding market. It is similar in size to the North American market and it is also mature though the emerging economies of Eastern Europe do promise much faster growth than the rest of the region (Table 9.1). Table 9.1 European car tyre market 2003 World Europe Quantity (m) Quantity (m) OE 280 89 Replacement 715 236 Total 995 325 Source: Bowfell Associates & industry

% 32 33 33

Because of the more vibrant market in Eastern Europe the overall market is forecast to expand at an average annual rate of 3.3% until 2008, somewhat faster than North America but much slower than in the high growth areas of Asia. Europe is a mature market but, in compensation, it is very large.

90

Light Vehicle Tyres

Perhaps the key to the market is that Europe is the home to more car manufacturers than anywhere else. The OEMs provide a market in their own right but they also set new demands on the tyre industry with every new model that is launched and this in turn leads to more sophisticated and more knowledgeable tyre buyers in the replacement market. European drivers cover less distance than their American counterparts, an average of only 14,000 km per year compared with 19,500 km, but they travel on more challenging roads and in more difficult driving conditions, requiring more control over the vehicle. This is brought out by the priorities they have in choosing tyres. In a survey commissioned by Michelin, drivers were asked about the most important attributes for tyres and control, especially control in wet conditions, was the clear leader (Table 9.2). In contrast to this list of preferences American drivers give far more weight to comfort and treadwear. Table 9.2 Preferred attributes for tyres in Europe 2003 Attribute Road holding on wet surface Braking distance Road holding on snow and ice Road holding at high speed Ability to maintain constant performance levels Ability to withstand shocks High mileage Driving comfort Fuel efficiency Continued driving when flat Environmental protection Aesthetic appeal Source: Michelin

% 87 85 78 72 71 70 68 68 57 56 50 20

Another difference between European and American drivers is that they tend to be more loyal to individual brands when replacing an OE tyre. If it has given good service 56% of European drivers will replace the worn tyre with the same brand compared with only 32% in the USA. This is probably explained by the emphasis that European drivers place upon performance. If the OE tyre has performed well the driver stays with the same specification chosen by the vehicle manufacturers. This higher level of loyalty and the greater importance given to better control of the vehicle explains the product mix of the European market. As in North America, about half of the market buy mass market tyres but a very high 41% of drivers use high performance tyres compared with 17% in North America. Table 9.3 European market by tyre type 2003 Quantity (m) Mass market 159 SUV 10 Light truck 23 High performance ‘H’ 71 UHP ‘V’ & ‘Z’ 62 Total 325 Source: Bowfell and industry

% 49 3 7 22 19 100

The same trends are obvious in the European market as in North America as they are driven by the same technological changes in the automotive industry. Wheels are getting bigger because the

91

Light Vehicle Tyres

vehicles are getting bigger and more powerful so the tyres follow suit. Tyre sizes of 16" and 17" are now much more common and low profile tyres are helped by this trend. They are generally thought to look smarter but the real advantage is that a bigger wheel can be used in the same wheel arch, thus giving better braking capability. Another area where the European market really is distinct from North America is in the preference for winter tyres. Although the winters are no worse than in many parts of America, winter tyres account for almost a quarter of the market. Again, the reason for this is the requirement by European drivers to have maximum control over their vehicles. The market is mainly concentrated in central and northern Europe – Scandinavia, Germany, Austria and Switzerland, but it is beginning to make progress in Eastern Europe as well. The rest of Europe use summer tyres all year round; there is only a very small market for all-season tyres (Table 9.4). Specification Summer Winter All-season Source: Michelin

Table 9.4 European market for seasonal tyres 2003 Europe % North America % 75 2 22 3 3 95

9.3 Supply Structure Most of the plants in Western Europe were built in order to serve a national market, but the changing economics of the industry, together with the dismantling of barriers to trade, have now altered the concept of regional management. Instead of a national management structure in each country, the tyre manufacturers now use all factories in the region as a production resource. Certain factories specialise in certain products, and these are then shipped to the markets that require them. It was the outsiders – Goodyear and Bridgestone – that first developed this idea of regional management, and it took some time for the indigenous companies – Michelin, Continental and Pirelli – to follow suit. It soon became the accepted and only way of doing things as the level of competition in the market ensured that economies of scale had to be exploited to the full. Two major changes in the industry stimulated this change to regional planning of production. The existing structure in the 1980s was swept away by the series of acquisitions and mergers that took place. This exposed a lot of spare capacity, and at the same time the European tyre market began to be targeted by unknown names from Eastern Europe and the Far East. These tyres often sold at less than half the price of a premium brand, and they were able to establish a firm foothold in the market. The market then turned down and overcapacity became very apparent. The remaining manufacturers had more capacity than they needed and they were losing sales to low cost imports. Tyre prices fell between 5% and 10% each year in the early 1990s and profits disappeared. The immediate reaction was to close some plants, and the main companies did this, closing peripheral plants in Ireland, Greece and Scandinavia, but the competition was as strong as ever so there was a longer-term effect on attitudes to costs. All the major firms began pursuing a consistent policy of raising productivity and reducing costs in order to become low-cost producers. The standard approach was to concentrate the production of one type of tyre in one or two plants and to adopt seven-day working on a plant-by-plant basis. Despite difficult negotiations with labour unions, this was eventually adopted almost everywhere. As a result of these changes, productivity rose dramatically, but this merely made the problem of overcapacity worse. A few plants had been shut down, but others had been opened, and many of the newly acquired plants in Eastern Europe had received a lot of capital investment. The solution was obvious – to close more plants in high cost areas – but the implementation of this strategy was much more difficult. The high profile of the industry and the location of the plants, many of them

92

Light Vehicle Tyres

in areas of high unemployment, meant that there were considerable political obstacles to making these decisions. At first many of the tyre suppliers took the easy way out by reducing the labour force gradually and concentrating production on a limited range of products. However, with the continuing rise in productivity, excess capacity worsened, and the companies acted to bring supply more into balance with demand. Continental was the first to act, probably because its problems were the most severe, but Michelin and Goodyear soon followed. Michelin had too many plants all over Europe, and Goodyear found itself in a similar position once it had agreed an alliance with Sumitomo and taken over management of that company’s tyre assets in Europe. Since 2000, announcements have been made that ten factories will be closed or dramatically downsized, and it is likely that several more will follow. However, Table 9.5 does not show the full impact of this round of closures, as they are often announced up to two years before the plant finally closes. Table 9.5 European tyre plants 2003 Country Michelin Continental Pirelli Goodyear Bridgestone Bulgaria Czech Rep 1 Finland France 13 2 3 1 Germany 4 3 2 6 Hungary 2 Italy 3 3 1 Luxembourg 1 Netherlands Poland 1 1 1 Portugal 1 Romania 2 1 Serbia Slovak Rep 1 Slovenia 1 Spain 4 1 3 Sweden UK 2 1 3 Total 31 9 7 15 6 Source: European Rubber Journal

Other 2 2 1 1 2 1 1 3 7 1

1 2 24

Total 2 3 1 19 16 2 9 1 1 3 2 6 7 2 1 8 1 8 92

This approach to capacity problems is slow, and more action is still needed. Europe has over 90 plants serving a market similar in size to North America, where there are only 60 plants. Michelin in particular has a problem in France where it still has 13 plants, but closing any plants in its home country is a very sensitive matter and it will take time to further realign supply in this area. Not only are there too many factories, but they are also out of balance. The multinationals have 58 factories in the west and only 11 in the east. This roughly reflects the balance of domestic demand in these two regions, but it disguises the substantial advantage the east has in lower labour costs. This is now coming to the forefront as recent investments demonstrate. Michelin has bought two factories in Romania, whilst Continental has built a new factory in that country and established a joint venture with Matador in the Slovak Republic. Goodyear and Bridgestone have been less active in this area, although Bridgestone’s commitment is now expanding significantly. Both have plants in Poland, Bridgestone’s being the focus for current investment, but Goodyear’s other purchase, in Slovenia, has a cost structure more akin to Western Europe than the east. Similarly, although Goodyear is now in control of Sumitomo’s two plants in the old East Germany, this is no longer a low cost production base.

93

Light Vehicle Tyres

The European tyre market is mature and relatively stable because of the long-term contracts in place with equity chains and independent dealers. Now that Goodyear has taken management control of Sumitomo’s Dunlop operations in the region, five multinationals dominate the market in Europe (Table 9.6).

Michelin Goodyear Continental Bridgestone Pirelli Others Source: Bowfell & industry

Table 9.6 Market share in Europe 2003 OE % 28 17 27 13 11 4

Replacement % 24 22 18 10 9 17

Michelin is the market leader in Europe, but in the course of the 1990s it lost a little of its market share because of its lack of a low price brand. It subsequently rectified this and gradually regained share, although its current strategy of focusing more on profitable, as opposed to just pure volume business, could have adverse market share implications once again in the future. However, its strength in OE supply puts it in a strong position in the replacement market because of the loyalty of many drivers to the OE brand. There are no signs yet but it could jeopardise this advantage if it continues with its policy of only taking profitable business with the OEMs. Continental has traditionally been the second largest tyre supplier to the European market, but Goodyear fought tenaciously for that position and eventually achieved it when it took control of Sumitomo’s Dunlop subsidiary. This has given it a strong secondary brand, but it has not been able to take full advantage of this, as the resulting combined market share is less than when the two companies were competitors. Pirelli has established a good niche with its high performance tyres and with the vehicle manufacturers, but it has never been able to build on this. Bridgestone is in a similar position, although it has not occupied a particular market niche. It had been gaining ground gradually, but the repercussions of the Firestone recall in North America resulted in a setback. Its aggressive plan to raise its share of the high performance tyre market in Europe, announced in December 2002, was hoped to have positive overall market share implications but there has been little sign of this so far. The ‘Other’ category comprises small European producers and imported tyres from independents such as Hankook and Kumho. The small European companies such as Vredestein (Netherlands) and Nokian (Finland) find it hard to compete against the multinationals with their economies of scale. Some, such as Avon of the UK, have sold out to larger companies (in this case Cooper), but the others are surviving by concentrating on niche markets and by entering into partnerships with other companies. Nokian is a case in point. It has a good reputation for winter tyres and it has allowed Bridgestone to take a 19% stake in the company. The independent importers bring in tyres from manufacturers elsewhere in the world, particularly from the Far East. These companies made dramatic market share gains when they first entered the market, as the tyres were sold at significant price discounts to existing brands. This progress swiftly slowed as the multinationals reacted by bringing in their own branded tyres from low cost countries, particularly the Far East, but the independents are still making gains. Kumho and Hankook have both made important advances by gaining small OE contracts that give them credibility, and both Indian and Chinese tyre manufacturers are beginning to develop distribution systems, though they still rely heavily on one-off contracts.

94

Light Vehicle Tyres

9.4 Retailing The key advantage that established companies have over importers is their control of existing aftermarket distribution channels. In most European countries the manufacturers sell to wholesalers who, in turn, distribute to retail outlets. Originally the manufacturers supplied tyres directly to retailers, but wholesalers now have largely taken over this role. The widening in range of both sizes and types of tyres as well as the proliferation of brands demanded by the market requires the supply of small quantities on a frequent basis to all outlets. However, the multinationals have kept an interest, as many of them have bought control of wholesalers. They still supply all makes, not just that manufacturer’s own brands, but it gives the manufacturer ready access to the market. The majority of retail outlets in Europe are specialist tyre fitting centres or tyre and exhaust centres; only a minority of replacement tyres are sold by independent garages, and an even smaller proportion by franchised garages. Michelin has estimated that, across the EU, 50% of replacement passenger car/light truck tyres are sold through tyre specialists (independent, tyre manufacturers’ controlled, chains etc.), 10% through car dealers, 20-30% through fast fit centres and the remainder through a variety of outlets. However, these overall statistics for the whole of Europe mask big national variations. Independent tyre dealers dominate the aftermarket in Germany, Italy, Scandinavia and Spain whereas in the UK, Belgium and the Netherlands, chains of tyre centres predominate. In all countries the independent dealers are consolidating into larger groupings, such as buying groups, in order to negotiate with the manufacturers. In France the channels split roughly into four. Independent dealers account for 27% of aftermarket sales, franchised dealers and garages 23%, autocentres 21% and equity chains 20%. In Germany the situation is rather different. Independent dealers in various groupings represent 48% of the market and franchised garages have a relatively strong position with 24%. The equity chains of the tyre manufacturers account for only 9%. The UK is different again, as wholesalers and their associated retail outlets control 46% of the market, whilst franchised garages have virtually no significance. The tyre manufacturers’ own chains represent 18% of the end user market (or about 11% if truck tyres are excluded). The fast fit sector in the UK is the most advanced in Europe and has 25% of the market. These channels are not static; new businesses are constantly entering or leaving the market and a few have original business plans which can upset the status quo. Internet sales are a current threat to existing operations but new threats can come from old competitors. The OEMs are once again eyeing the market more actively. For some years they have been encouraging their dealers to establish fast fit and menu service operations and now Vauxhall (GM’s UK brand) is using its buying power to supply tyres at low prices to its dealers. This has been tried before by Vauxhall, Ford, Renault and others but the dealers have made few inroads into the market so far. Throughout Europe, and particularly in the four largest countries, the large tyre manufacturers are important players in the retail market, owning their own chains of fitting centres, or equity chains as they are known. Some of the manufacturers such as Goodyear and Michelin have had these outlets for many years, as they were regarded at first as a good way of keeping in touch with the market. However, this developed into a method of maintaining or improving market share. As this grew in importance, other manufacturers became involved, and they too invested in their own chains of fitting centres when they had the opportunity and where market conditions required. Inevitably this approach did not result in profitable operations, and none of the multinationals make a satisfactory return on their equity chains. In the 1980s and 1990s that was regarded as less important than marketing goals, but greater financial realism has come into the industry. All the companies are striving to make their chains profitable but where they believe this is not possible they have sold out as Continental did with its 550 centres in the UK. Goodyear is looking for economies of scale where possible by merging Dunlop’s 96-strong Holert Konz chain with its own

95

Light Vehicle Tyres

outlets and it is also culling the unprofitable outlets. It is not leaving the retailing business, however, as in early 2004 it consolidated its partial ownership of the Swedish chain, Dackia. The one company that is going against the trend is Michelin, possibly because it is market leader and it can obtain better margins than its competitors. It has brought all its European outlets together under the Euromaster brand, and it took a major expansionist step in early 2003 when it announced its intention to acquire the tyre distribution business of Group Viborg. This purchase added 465 tyre outlets to Euromaster’s existing 1,200 outlets. Viborg is a specialist tyre dealer active in distributing and servicing tyres in northern Europe, especially Germany and Denmark. The acquisition will be particularly valuable for Michelin in Germany, where Euromaster has a weak network. According to Michelin’s estimates, Germany is Europe’s largest market for replacement tyres, with just under 25% of the passenger car and light truck tyre market, and Viborg has more than 300 retail outlets in the country, whereas Euromaster previously had just 35 points of sale. Michelin also estimates that the combined network will account for a share of about 8% of the European market for light vehicle tyres. However, Michelin has more in mind for Euromaster than just helping to build market share. It is an essential part of Michelin’s plans to service vehicle fleets and it is also being used to support other marketing initiatives by the firm such as its tyre guarantee programme. Bridgestone was rather later entering the retail business as it is much weaker in Europe than in Asia or North America. As a result it developed a franchise rather than investing directly in a chain, and this gave it the luxury of being able to pick and choose outlets to a limited extent. However, in order to give it a feel for the market it bought a small chain of 16 outlets in 2004, Kingsway Tyres. Despite this apparent change in direction, the partnership approach is now regarded as the most viable strategy for most tyre manufacturers because they do not have to commit capital and it offers a method of increasing market coverage in a cost effective manner. Tyre manufacturers own or are in partnership with over 37% of the 5,500 genuine fast fits now operating in the UK. These outlets, whether equity-owned or a franchise, are usually free to sell any make of tyre, although they should give preference to their principal’s products. In practice, because so many are independent businesses and because tyre marketing is so competitive, it is quite possible to find, for example, a Pirelli tyre being sold on special offer at a rival chain cheaper than its price at a Pirelli-owned outlet. What does seem to be lacking is an imaginative approach to tyre retailing. All the chains are basically similar and all sell mainly on price. There are few attempts to differentiate the chains or to educate the customer. The equity chains in Japan and the US are a little better and it would not be difficult to cross-fertilise ideas, as the European chains certainly need an external stimulus. The real growth in the European tyre market is found with independent groups, usually led by an entrepreneur. The biggest success story has been KwikFit in the UK, which has built up more than 700 outlets by expansion and acquisition, and it is developing in continental Europe from a base in the Netherlands and Belgium. This success attracted the attention of Ford, which was looking at maximising revenue over the whole life of a car, and it purchased the company. However, a change of management and of strategy led it to sell KwikFit two years later although still retaining a 20% equity share. Other groups such as Midas in France are following the same pattern. The common factors with the successful chains are a good location in the cheaper part of a busy area, a standard appearance for both the outlet and the employees, and a heavy advertising spend. They are price competitive, with a number of well-promoted lines, but margins rise with other, more specialist products. The overall impression to the customer is of an efficient organisation giving good value for money. Most of the independent chains have their own private brand because they can obtain higher margins. Although they are cheaper to buy, they are not necessarily sold at a cheaper price. KwikFit, for example, has its Centaur brand made by Firestone, yet it sells it at a higher price than Firestone tyres because it believes the KwikFit name can command a premium.

96

Light Vehicle Tyres

Eastern Europe is still behind developments in the west but is catching up rapidly in many areas. The most dramatic change has been in production rather than domestic market growth. Nevertheless, although much of this extra production is for export to Western Europe, the domestic markets are also growing rapidly, at about double the rate in the west. In order to service this market, the multinationals are gradually developing retail outlets. Rather than establishing equity chains, the multinationals are encouraging local companies to establish fitting centres, providing them with training, not just in technical matters but also in running a business. 9.5 Russia Russia has always been something of an enigma to the West and so it has proved since the economy appeared to open up after 1990. The break-up of the Soviet Union appeared to promise enormous opportunities for Western tyre manufacturers. A relatively sophisticated economy that had been starved of consumer goods was opening up to foreign investment in order to attract capital and technical expertise. However, although the multinational tyre suppliers were very quick to invest in the countries of Eastern Europe, they were much more reluctant to do so in Russia itself. They all established sales and liaison offices in Moscow and experienced some success in selling imported tyres, but it took a long time before any company was prepared to invest in manufacturing. This caution appeared well-placed when the economy collapsed in 1998 but since then the economy has performed well, mainly because of high commodity prices, particularly oil. But it is not just a better economy that the tyre majors have been waiting for. If they are to invest in the country they need confidence that such basic requisites for commercial undertakings as a sound legal system, clear property laws and a relatively efficient and honest bureaucracy exist. There are no guarantees that these are yet in place but the situation has stabilised sufficiently for both Continental and Michelin to make major investments. Goodyear and Bridgestone have not been as bold but they have both increased their involvement by signing offtake agreements with Russian tyre manufacturers. The market is beginning to open up but it is far from being a normal market and there are likely to be various mishaps along the way. Nokian, a western company with probably more knowledge of the Russian market than any other, has already had its fingers burnt. It will not be the last.

9.5.1 Market The Russian tyre market, including imports, is estimated to be in the region of 35 million tyres at present. The central government still keeps precise production statistics but the problem is whether these can be relied upon. Table 9.7 represents the most reliable estimates. Table 9.7 Russian tyre market 2003 (m units) Production 32.8 Plus imports 4.6 Plus smuggled 1.2 Less exports 3.7 Market 34.9 Source: Industry estimates Production has been gradually increasing from a low point in the late 1990s and imports are decreasing slowly because domestic production is becoming more reliable. Conversely, exports too are declining as the manufacturers find it easier and more profitable to supply the domestic market. There is a substantial foreign trade in tyres but this is mainly confined to trade with the countries of the CIS. Most exports go to this area and about half of the imports are from the Ukraine and Belarus. The big decline is in smuggled tyres, partly because the customs service is more efficient but mainly because the profits are lower. However, the market is buoyant as the economy grows on the back of higher oil prices. The market for passenger cars is likely to be healthy for many years as

97

Light Vehicle Tyres

the level of car ownership in this country is far below capitalist economies. There will be no explosion in car ownership as average incomes are relatively low, particularly in rural areas, but there will be a continuing positive demand as consumers aspire to car ownership. Set against this positive influence, the quality of tyres is likely to improve quite dramatically with the introduction of some western technology and management methods (particularly quality control) as well as increased competition between the producers. This will mean that tyres will last longer and fewer will be needed to cover the same distances. The unrealised demand for vehicles is huge, and per capita car ownership is among the lowest in Europe. There are 28m cars in the Russian parc, but almost half of these are owned by official organisations. Only about 15.5m cars are privately owned, which translates into one car for every ten people, compared with one car for every two people in Germany. Prices of Russian made tyres have fallen dramatically in the last two or three years as the main producers fight for sales. Typically the price for a Russian tyre, depending on the manufacturer, would be US$15-23. In comparison, a Michelin summer tyre would cost US$70-80, and a Michelin winter tyre US$110. According to Amtel, a Russian-made R18 tyre sells for about US$15 whilst a brand name western equivalent sells for US$55-65. Currently these western tyres account for about 15–20% of the market for passenger tyres. Western tyres are without question better made and much more durable, but there is also a certain cachet in using them for those Russians that can afford them. However, the prestige value of western tyres cannot command such a premium across all brands. As Russian tyres are simultaneously improving in quality, a typical less well-known western tyre now sells for about three times its Russian equivalent rather than the extravagant multiples of the past. A typical Russian tyre might last only 20,000 km, but some of the better quality ones would last twice that distance; nevertheless, an imported tyre would last twice as long again. These dramatic differences are already beginning to fall as Russian sourced tyres with western brand names begin to appear on the market and this narrowing of the gap will continue for several years. The big problem for the market is the poor distribution of all products, not just tyres. The big cities to the west of the Urals are well supplied but distances in Russia are enormous and rural areas, particularly in Siberia, are very remote. This too is gradually changing but it will take decades before a good distribution system is operating over most of the country.

9.5.2 Supply Structure Before 1991 there was a planned economy, and all the factories had guaranteed sales at fixed prices. Under the old system, production targets were set by central government, raw material contracts were arranged for the plants, and distribution to the end user was carried out by other agencies. The factories themselves were run by bureaucrats rather than by businessmen, and it was a matter of fulfilling quotas rather than satisfying demand. All the plants were usually operated at full capacity. At the time of the break-up of the Soviet Union there were 18 tyre factories, producing most of the country’s needs for passenger, truck and agricultural tyres. These plants are now in five separate countries, twelve in Russia, three in the Ukraine and one each in Belarus, Uzbekistan and Kazakhstan. However, because of their common legacy, they share many of the same problems and characteristics. When the change took place, this overall structure disappeared virtually overnight and the individual factories were cast loose to fend for themselves. In a culture where everything had been decided by the state, this was a traumatic shock. The breakdown in the traditional procedures left the individual General Directors, who were the politically appointed factory managers, in a very powerful position. They had absolute authority over their operation, no guidelines and no authority to which to report. In these circumstances standard business procedures often broke down and corruption was rife. Anything that could be stolen was stolen, and in particular many unusual arrangements were set up to distribute tyres. In a collapsing economy, where there is little faith in

98

Light Vehicle Tyres

money, any consumer goods become particularly valuable, and tyres were no exception. The General Directors often appointed agents to distribute tyres in a particular area, and personal arrangements were made to share the profits. After this relatively short period of anarchy, all the tyre factories were privatised between 1992 and 1994. They were usually turned into joint stock companies and shares given to managers, employees and outside interests, particularly local government. This usually meant the city or the province in which the factory was sited. The factories carried on, but under people who were not natural businessmen and certainly not entrepreneurs. Much of the revenue from sales was diverted away from the business in one way or another, and the companies were not able to pay for their raw materials, particularly synthetic rubber and energy. They consequently built up enormous debts quite rapidly. Both central and local government became aware of the problem, and in most cases the first generation management teams have been replaced. Although these managers often had equity control of the business, the accumulated debts were so large that in effect the equity had negative value. Ownership was secondary to the size of the debt. Two companies in particular took advantage of this to take effective control of many factories. Neftekhimpron (Petrochemical Industries) was in a strong position as a supplier of raw materials, and it assumed a proportion of the debts of several factories, in effect taking control, although not actually owning the plants. The other consolidating force after 1996 was Rosshina (Russian Tires), a financial group rather than a supplier, but with a number of top managers with a background in the tyre industry. This company took similar control of five large Russian factories, Yaroslavl, Moscow, Omsk, Yekaterinburg and Krasnoyarsk. However, along with shares in the various businesses, Rosshina also took on their debts, and as it could not pay these, it was then taken over in turn by Yukos, a major oil company. Many of the factories are now controlled by Sibur, a subsidiary of Gazprom, the monopoly gas company but the other major player is Amtel, a diversified holding company owned by an Indian businessman, Sudir Gupta. It has interests not just in chemicals and tyres but also in fast-moving consumer goods. It has acquired interests over the last three years in Kirov, Voronezh, Krasnoyarsk and Rosava (Ukraine) and it also claims to be the major shareholder in the Volgogradsky carbon black plant as well as plants making tyre cord. Table 9.8 Capacity of Russian tyre plants 2003 Plant Capacity (m units) Nizhnekamsk 12 Yaroslavl 6 Omsk 5 Moscow 3 Volzhsky 2.5 Vjatka (Kirov) 2.5 Voronezh 2.5 Barnaul 2 Krasnoyarsk 2 Uralsky (Ekaterinburg) 1 St Petersburg 1 Source: Industry sources There are 12 tyre plants in Russia but many of them are small and all of them have relatively old equipment. A few plants have machinery installed in the 1980s, but it has been badly maintained and in many cases often lacks spares. This situation is beginning to change and Amtel in particular has been investing in new equipment. According to its plans it hopes to double the capacity of each of its factories over the next five years and change the emphasis to radial tyres and away from cross-ply. In these circumstances capacity can be a notional figure, but the summary shown gives

99

Light Vehicle Tyres

an indication of the notional capacity of the various tyre plants, arranged roughly in order. The biggest by far is Nizhnekamsk, but Yaroslavl and Omsk are also large plants. The remainder are medium sized or small and generally below what is regarded as an economic size for a modern full range tyre plant. Michelin’s new plant at Davydovo is expected to have a capacity of 2 million tyres when it reaches full production in 2005 (Table 9.8). In general terms, the plants to the east of the Urals are smaller and older than those to the west, and they also serve a more widespread population. Only about 40% of the population live east of the Urals, and most of the industry is in the European part of Russia. The Russian tyre industry is a bear pit for the unwary but it is gradually normalising. Amtel has already sold a small stake to Templeton Investment, a western venture capital firm, and it is preparing for a flotation in late 2005. The Sibur/Gazprom interests are stabilising now that Gazprom has finished suing its subsidiary but the suspicion remains that senior management will not give the tyre assets the attention (and investment) they need. Niznekamskshina is a giant producer compared with the other Russian facilities and it is controlled by the Tartarstan local government but it needs outside expertise. It is in contact with various of the multinationals and has committed itself to considerable investment so it should be able to maintain its dominant position in the Russian market despite the advances of some competitors. The market leader with imported tyres is Nokian Tires. Finland has always had close ties with Russia, and Nokian has been able to build on this to establish market leadership. Bridgestone too uses the Finnish connections with Russia, and these tyres are imported using the Marubeni and Mitsui trading houses. Bridgestone is currently selling tyres worth about ¥4 billion in Russia but it plans to raise this to ¥10 billion by 2005. To do this it is trying to build up a network of 200 franchises. It has also arranged a contract with Rossava in the Ukraine to produce 200,000 tyres annually. In general terms the Japanese and South Korean companies are stronger east of the Urals, whilst the European brands predominate in Russia west of the Urals. In particular they are concentrated on Moscow and St. Petersburg as this is the main concentration of private cars. The four biggest selling brands are Nokian, Continental, Matador and Bridgestone, but all the other major tyre companies have a presence in the Russian market. Goodyear was one of the first companies into the field, but initially it supplied the market from plants in Turkey and the quality of the tyres was not as good as the Russians believed a ‘western’ tyre should be. Goodyear acted quickly to change the source, and it has now made a concerted effort to establish one of the best distribution systems in the country. Goodyear tyres are widely available, and the market share should improve significantly, particularly now that the company has raised its presence to an officially approved entity from a representative office. The offtake agreement with Yaroslavl should give the company more product with which to establish a sales network throughout Russia but the company is being careful to use a private brand, Medeo, for its locally-made tyres. These are studdable winter tyres but the company is now building on this experience to extend the agreement into summer and all-season tyres. Production of these tyres uses Goodyear technology and Yaroslavl moulds. However, the recent very public row between Yukos, the biggest oil company in Russia, and the government has given foreign investors much to think about. It raises the spectre that the government might be willing to allow some renationalisation and immediately raises the question as to whether other firms are safe. In a wider context it puts into doubt the current perceived role of the state vis-à-vis the economy. Many in government believe that their job is to defend the state’s interests against business, not to aid business in achieving its aims. As a result, Russia faces continued conflicts between the bureaucracy and businesses, fought out through a biased judicial system. Whatever trust has been built up between business and the state is now being undermined and will encourage local politicians and officials to use the same methods, thus delaying the creation of a neutral and fair judicial system even further. This should not affect the operation of Michelin too

100

Light Vehicle Tyres

much as it is in partnership with the European Bank for Reconstruction and Development, an organisation that carries considerable influence with the Russian government. However, joint ventures such as those established by Continental and Nokian would seem to be far more vulnerable to these political shifts. It is little wonder that the movement of the big tyre companies into Russia has taken so long and explains the tardy progress of such companies as Bridgestone and Goodyear in establishing their own manufacturing operations in this country.

101

Light Vehicle Tyres

102

Light Vehicle Tyres

10 Asian Market 10.1 Overview As a market for tyres, North America is relatively homogeneous and Europe is rapidly moving in that direction but Asia is a geographic term for a wide variety of different cultures, climates and countries. In economic terms it ranges from the rich but mature market of Japan to some of the poorest countries on earth. It may be a geographic region but for the companies involved in selling tyres it has to be considered as many separate countries. Together they account for more than 60% of the world population and six of the ten most populous countries are in Asia but they still remain very distinct. A number of trading blocs have been established to foster free trade in the region but they have made little progress and cannot be compared with the North American Free Trade Agreement (NAFTA) or the EU. However, it is growing very rapidly as a region and the tyre market is growing with it. All the major companies must be active in the area or they will miss out on vigorous growth rates in most of the countries and enormous potential markets. Japan is the dominant economy in the region, but it has far more in common with Europe or with North America than with its Asian neighbours. It is a mature and sophisticated market and is only growing slowly. After the Japanese miracle of the 1960s growth continued strongly for two decades, but by 1990 the rigidities in the economy became clear and the country has virtually stagnated since then, despite huge amounts of investment in infrastructure projects in the misguided belief that this would kick start the economy once more without the painful experience of reducing public subsidies, increasing competition and writing off the heavy load of bad debt carried by the banks. In the last twelve months the first encouraging signs have appeared and the Japanese economy could once again be on a growth path. Japan is also the base for four major tyre manufacturers with international interests – Bridgestone, Sumitomo, Yokohama and Toyo. South Korea and Taiwan are also relatively sophisticated economies, although much smaller than Japan. Kumho and Hankook are based in South Korea and Taiwan has several smaller tyre manufacturers with a strong export base. China and India are the two largest nations, not just in Asia but in the world. In economic terms both these countries have been largely insulated from the rest of the world until the last decade when they both changed direction and began to open their economies to outside influences. As a result they have both shown extraordinary growth, particularly China, and have become magnets for outside investment. The potential for growth remains huge and they offer a tempting market for all tyre manufacturers. Each of them has a large indigenous tyre industry but in need of investment and new technology. Other countries in Asia are smaller but they too are growing rapidly and present attractive high growth markets for companies which have only low growth prospects in their existing markets in the developed world. In total Asia offers a combined market almost equal in size to that of Europe or North America but with much better growth prospects (Table 10.1). Table 10.1 Regional market for light vehicle tyres 2003 North America Europe Asia Other million % million % million % million % OE 80 29 89 32 96 34 15 5 Replacement 250 35 236 33 150 21 79 11 Total 330 33 325 33 246 25 94 9 Source: Bowfell Associates

World million 280 715 995

Table 10.1 shows only light vehicle tyres but if truck tyres were included Asia would be even more significant as it is the largest market for these higher value products. As it is it absorbs more OE tyres than either North America or Europe thanks to the large vehicle manufacturing operations in Japan and South Korea and a growing demand in China. It is not yet such a large market for

103

Light Vehicle Tyres

replacement tyres but this is increasing year by year as the car park in these countries grows. Overall the OE market is expected to grow at 6.2% annually until 2008 but the replacement market will grow at a somewhat lower rate of 4.1% because the large, slow-growing market in Japan will counteract the rapid growth in China, India and southeast Asia. Many of these countries are classed as developing markets but they demand tyres which are as sophisticated as those in the developed countries. The market for cross ply tyres is declining rapidly as radials are becoming available and almost all new investment is exclusively for radial tyres. As in North America and Europe there is a trend towards larger tyre sizes as wheels get bigger and the demand for high performance tyres is actually higher than in North America (Table 10.2). Table 10.2 Asian market by type of tyre 2003 million % Mass market 118 48 SUV 25 10 Light truck 49 20 Performance H 22 9 Performance V & Z 32 13 Source: Michelin 10.2 Japan

10.2.1 Introduction The Japanese tyre market is more like the European or North American market than that of any other Asian country. It is urbanised, mature and slow growing as in the west, but there are some major differences. It is a much newer industry than in the west, having grown from virtually nothing in the last 50 years, mainly because of the rapid expansion of car manufacturing in that period. It is also much more export oriented than most developed economies though this is becoming less important as the Japanese OEMs establish transplants in North America and Europe. Overseas production by Japanese car manufacturers is expected to top 10 million units as early as 2005 and surpass their output in Japan. The converse of this is that the market is less exposed to imports of tyres though this too is beginning to change. Finally the Japanese market is unique in having such a large proportion of “K” cars (small cars under 600 cc) because of the local tax structure. More than a quarter of the park is comprised of these mini cars and this leads to smaller tyre sizes being in strong demand.

10.2.2 Market The maturing market in Japan has provided a growing demand for replacement tyres, and the tyre industry has become less dependent on OE supply. In 1975 OE demand accounted for 60% of the Japanese market for tyres; by 1988 this had fallen to 47% and in 2003 it was 33%. This is still higher than the proportion in North America and Europe where it averages about 30%, but it is a clear indication of the maturation of the Japanese market. The total domestic market of about 150 million light vehicle tyres (OE + replacement + imports) has hardly grown at all in the last decade because of this decline in OE demand. Replacement demand has grown steadily, averaging 2% per year, and has now reached 67 million but a smaller market for OE tyres has negated this steady growth. Until recently, a substantial rise in exports has been largely cancelled by a similar proportionate rise in imports, so domestic production has only risen by 0.5% per year. Sales to the OE manufacturers are usually conducted directly, and supply contracts average about four or five years, the production run of a particular model. In Japan, until very recently, almost all important businesses have been members of keiretsu. These are large “families” of companies, usually led by a bank and a trading house, which can cover most areas of the economy. The companies are closely bound together with both formal and informal ties and they usually give as

104

Light Vehicle Tyres

much of their business as possible to other members of the keiretsu. These organisations have in the past, dominated supplier relationships and they still exert a significant influence in Japanese business though the travails of the economy over the last decade have broken down many of these relationships. Atypically for the automotive components industry, the tyre manufacturers are largely independent of the traditional keiretsu structure. Nevertheless, there are still extensive cross-shareholdings that are designed to cement relationships. For example, Bridgestone owns shares in nine of the 11 domestic automakers and, in turn, Toyota owns 0.5% of Bridgestone’s equity. All of the vehicle manufacturers buy from all of the tyre producers, and over time the purchases are similar to the market share each company holds. Consequently Bridgestone is the largest supplier with almost 50% of the market, followed by Yokohama (23%) and Sumitomo (19%). However, this cosy structure is beginning to break down. The keiretsu system has been under pressure for some time as international competition has forced OE manufacturers to seek out lower cost suppliers, and the influence of Renault on Nissan’s management has accelerated this process. So far this has not had much effect on the tyre manufacturers, but it is likely to strengthen Bridgestone’s position as the leading Japanese producer.

10.2.3 Supply Structure Four Japanese manufacturers are in the top ten global companies – Bridgestone, Sumitomo, Yokohama and Toyo – and these firms dominate the market in Japan. Bridgestone alone has a market share of 46% and Yokohama and Sumitomo have shares of 23% and 19% respectively (Table 10.3). Table 10.3 Tyre production facilities in Japan 2004 Plants Bridgestone 9 Yokohama 5 Sumitomo 4 Toyo 2 Others 3 Total 23 Source: Tire Business The “Other” category in Table 10.3 comprises a plant owned by Inoue Rubber , a small Michelin plant and a joint venture for large tyres between Toyo and Goodyear. The other major international producers are now strengthening their presence in Japan. As part of its alliance with Sumitomo, Goodyear has given the former firm full control of its marketing in Japan and this is already paying off in the form of increased volumes in both the OE and replacement markets. Sumitomo has also strengthened its presence in the market by taking full control of Ohtsu which is resulting in cost savings and a more focused sales strategy. The formation of a joint venture between Continental and Yokohama to co-operate on technology and tyre production in Japan could give a similar boost to Continental. The company that appears to be left behind in this is Michelin though it has long had a joint venture in Japan selling tyres in the replacement market. Michelin Japan Group has now taken complete control of its former joint venture and this could suggest that Michelin wants to take a more active role in the Japanese market. Imports are always a sensitive subject in Japan as foreign governments apply pressure to dismantle the non-tariff barriers to imports. Until 1986 the Japanese market was essentially closed to foreignmade tyres, but in that year the vehicle manufacturers instituted voluntary programmes to import US-made parts under the Market Oriented Sector Selective (MOSS) agreement. Tyre imports rose quickly after this to a level of about 14m tyres each year, but they have stabilised at this level ever since, rising to almost 17m tyres in 1997 but then falling away again. In relation to the domestic

105

Light Vehicle Tyres

market for passenger car tyres, imports have remained fairly steady at between 11% and 15% over the decade, the 2003 sales level representing 12.9% of the market. After 1986 the first imports were made by the OEMs as the domestic tyre makers had a strong control over the replacement market. However, an independent retail chain decided to move into own brand tyres. Autobacs Seven, which specialises in automotive accessories and parts, tried to persuade each of the Japanese manufacturers to supply it with an own brand tyre but was unsuccessful. It then approached Cooper Tire in the US and has been importing ever since. More recently the major Japanese companies have been importing their own foreign brands such as Firestone in order to service the segment of the market that regards imported tyres as having a special cachet. The European sources have made little headway into the Japanese market, and South Korea is also finding the market difficult, but tyres made in Taiwan are gaining market share. Chinese imports are also significant, and the rapid rise in this is largely attributable to Japanese joint ventures in China. Toyo has had a joint venture with Cheng Shin Rubber for ten years, and Bridgestone has a small joint venture with Shenyang Tire. The key development in the last few years has undoubtedly been the acceleration in tyre imports from Thailand and Indonesia. In 1992 imports from Thailand amounted to 268,000 units, a figure which had risen to 3.2m units in 2003. For Indonesia the figures were 232,000 and 2.6m respectively. Thailand is now the third most significant source of imports, behind the USA and Taiwan. On the whole, imports from local factories in Asia of Japanese tyre producers are on a firmly increasing trend. Future growth in imports will favour the low cost countries such as China, India and South East Asia as growth is likely to come with private brands for the replacement market. Speciality stores are opening up which are more retail oriented – traditionally the majority of tyre outlets have been service-oriented. If private brands are successful, this should help the growth of passenger car tyres as imports. These have stagnated over the last decade, whereas imports of truck and bus tyres have increased.

10.2.4 Retailing The distribution of automotive tyres in Japan is divided into three channels: original equipment; replacement; and exports. Distribution channels for replacement tyres are particularly wide-ranging and complex, with vehicle distributors which have taken a leading role until recently, having now been overtaken by speciality stores (Table 10.4). The chief distribution channels are roughly divided into two types: direct sales and indirect sales. Direct sales are those under which distributors sell tyres directly to some large users, such as transport, bus and taxi companies, and government and municipal users. Indirect sales are those under which dealers supply tyres to end users. According to Yokohama “In Japan, the attitude toward buying tyres is different than in the west. To the Japanese, new tyres represent the renewal of a car's life and it's a happy purchase for people who like to drive.” Table 10.4 Types of tyre distribution outlets in Japan 2002 1988 2002 % of total outlets % of total outlets Auto speciality stores 22 31 Car dealers 30 25 Service stations 16 16 Discount/DIY 7 10 Independent tyre shops 7 9 Company tyre shops 6 7 Other 12 2 Total 100 100 Source: AM Network

106

Light Vehicle Tyres

A marked feature of tyre distribution in Japan over the last decade has been the sharp growth in discount and auto speciality chains such as Autobacs and Yellow Hat. The growth of these chains has threatened to erode the pricing power of the tyre manufacturers, as they demand and receive large discounts in return for bulk orders. The situation was made more difficult by the adoption of the open price system. This was similar to the abolition of retail price maintenance in the UK many years ago. Prices immediately dropped by about 10%, and the retail speciality stores have maintained and increased their aggressive pricing policy since then. Autobacs is the oldest and largest of these chains and it has now opened its first US Super Autobacs “Car-Life” mega store in Orange County, California and another store in Shanghai. In order to defend against the erosion of their channel margins and eventually their own sales margins, all the domestic tyre manufacturers have developed a variety of both equity and affiliated dealer chains (Table 10.5). Not only do these chains insulate them to some extent from price pressure, but they can also ensure consistent branding, more efficient retailing and provide access to market intelligence. The big manufacturers, Bridgestone, Yokohama and Sumitomo, have developed several types of chain in order to address all segments of the market and at the same time keep the competition at bay. Retail sites are difficult to acquire in Japan, and a further problem is to find enough qualified managers with entrepreneurial instincts. Once a company has a site, it is reluctant to relinquish it in case a competitor steps in. Bridgestone has been particularly innovative in its retail strategy, and the other companies have followed this lead. The Cockpit chain is focused on the young, high-spending enthusiast and sells a range of wheels as well as low-profile tyres and other high margin products. The stores are bright and clean, even offering coffee for customers. The managers are often the sons of existing franchisees, thus retaining a loyalty factor but at the same time introducing new ideas and enthusiasm. The Tire Kan stores are aimed at the more mature drivers who want a clean, quick tyre change, whilst Mr. Tireman is a more traditional outlet. Bridgestone has introduced its own Firestone brand in order to segment the market, particularly at the high end, but it has not launched any secondary brands. Company Bridgestone

Yokohama

Sumitomo

Table 10.5 Tyre distribution chains in Japan 2003 Chain Cockpit Tire Kan Mr Tireman Grand Slam Tire Town Tire Garden Autoland Tire Select Tire Land

Toyo Ohtsu Total Source: Industry sources

Number 250 270 300 210 60 200 144 79 32 340 160 2045

Yokohama operates three separate chains. Grand Slam and Tire Town are made up of dealers, partially owned by Yokohama through its sales subsidiaries. Tire Garden is composed of 200 of the 600 authorised Yokohama dealers who are grouped under the ‘Yokohama Partner Shop’ banner. The company set up Yokohama Franchise Center (YFC), a 100% subsidiary, to co-ordinate the dealer expansion programme. Through financial support YFC encourages dealers to unify signage and also co-ordinates regional marketing efforts between dealers. Yokohama has now taken the major step of supplying a private brand, something it had previously refused to do. It is

107

Light Vehicle Tyres

manufacturing the Idemitsu brand for a chain of petrol stations, and Ohtsu is following the same route. 10.3 South Korea South Korea has been taking an active part in the world economy for five decades and has taken lessons from both China and Japan, developing a system of state capitalism that converted it from a poor rural economy to a major manufacturer of sophisticated consumer products. As in Japan, the tyre industry has grown alongside the burgeoning automotive industry, but it is not reliant upon it. It plays an important role in the world tyre industry and the two indigenous tyre producers, Kumho and Hankook, have established their brands with some success in Africa and South America as well as the more mature markets. The domestic market in Korea is still very dependent upon OE orders, but it is becoming less so as the car parc develops and the economy matures. Koreans are becoming richer but car ownership is still the exception rather than the rule. As a result the replacement market is only a little larger than the OE market. In 2003 passenger car tyre replacements amounted to just under 10m tyres with light trucks accounting for another 2.5m. The market for OE tyres was 6m passenger car tyres and 2.5m light truck tyres. Passenger car tyres are the growth sector of the market, growing at twice the rate of commercial vehicle tyres as the car parc expands. Although the nature of the market is changing the structure is not, as distribution outlets are tightly controlled by the two largest companies – Kumho and Hankook. Each have their own chains of franchised operations and these are exclusive to the firm, selling only that company’s brands. Even though South Korea has now become a member of the WTO, it is not likely to see a flood of imports in the near future. Distribution is the key to market share, and imported brands will not find it easy to make inroads in this market unless there is government legislation to assist them (most unlikely) or they come to some agreement with Kumho and Hankook to share distribution channels. The one multinational which may be able to make an impact on the Korean market is Michelin as it has now taken a 10% stake in Hankook. Although the alliance between the two companies is mainly for Michelin to have access to modern and relatively cheap production in the Asian region, it may be able to use Hankook’s distribution network to gain access to the local market. Kumho and Hankook, dominate the domestic market as well as being major exporters. Their origins, development and ambitions are very similar, so much so that they are intense rivals. Hankook has a slightly larger share of the domestic market, whilst Kumho exports more. Both have invested heavily in new factories and both have built plants in China. Indeed, both grew at a remarkably rapid rate throughout the 1990s, helped by the similar rise in the Korean automotive industry. Each company has two plants in South Korea which account for the bulk of their output. They are relatively new and very large so they are very efficient. In January 2004 Kumho Tires completed construction of a tyre plant equipped with an automated production unit in Pyeongtaek, south of Seoul. The new factory can produce 6,000 tyres per day, with annual production capacity expected at 2 million. The company's total annual production now is 36.6 million tyres. However, high rates of growth put very heavy strains on the finances of companies, and it is usually only possible to continue that rate of growth if the economy carries on growing rapidly and if there is no change in external circumstances. Just such a change occurred in 1998 when many of the Asian economies got into difficulties and South Korea faced major structural problems. The problem was particularly acute for Kumho and Hankook as they had high levels of loans, and many of these loans were denominated in dollars. In addition, many of the raw materials for tyres were priced in dollars at a time when the won at one stage lost 40% of its exchange value. Both companies were caught in a vicious circle. As the won depreciated, they needed to boost exports in order to generate enough hard currency to service their foreign debts. In addition, in order to finance the exports they needed to borrow still more foreign exchange. In the event, although

108

Light Vehicle Tyres

exports slowed a little in 1997 they kept on rising, and the economy recovered more quickly than most expected. The banking system was restructured and the big chaebol that dominated the economy were put under pressure to focus on fewer industries and to unlock the web of cross holdings in order to improve financial transparency. The Korean chaebol are similar in many respects to the Japanese keiretsu but with the important difference that they were created with the tacit support of the government. That was seen to be the best way to develop the economy quickly and it worked. Now, however, Korea is a well-developed economy and the chaebol are believed to be hindering free growth of new industries so the government is trying to reduce their influence. Hankook survived and, although still heavily indebted, it remains independent although it has now entered an alliance with Michelin. Kumho has not fared as well, as it was already more indebted than Hankook and it was part of a small chaebol, which also contained an airline and a construction business – both cash-hungry industries. As a result, it has been openly for sale since 1998, not a good atmosphere in which to run a business. Several economies have been made, such as selling a plant in China and making limited redundancies, but the real problem has been financial, not operational. Buying any Korean business is notoriously difficult, even when both parties and the government want the proposed outcome. Much of the reason for this is technical, but there are also important cultural difficulties as well. Quite apart from the debt burden, there are often inherent obstacles such as licenses owned by western or Japanese companies and the internal dealings between parts of a chaebol. Eventually a typically Korean solution was found with the army pension fund buying control via a venture capital subsidiary. The importance of Korea for the world tyre industry is that it is the home of two aggressive and ambitious manufacturers. The domestic market is significant, both for OE supply and, increasingly, for replacement tyres but it is still smaller than several European countries. In addition the market is particularly nationalistic and outsiders have a very difficult time establishing any sort of presence. Michelin may have created a foothold for itself by purchasing 10% of Hankook, the market leader, but its motives were almost certainly on the export potential of the company rather than its domestic position. Both companies have established a large export trade, particularly in the small but difficult markets of Africa and the Middle East which the majors have found almost impossible to penetrate. They have both expanded rapidly but in doing so they have taken on far too much debt. This did not matter before the Asian financial crisis as both companies could rely on sympathetic treatment by the banks but in the last five years the economic climate in Korea has changed markedly. The chaebol are no longer the favoured sons and the government is trying to develop smaller companies and to diversify the structure of business. An added disadvantage is that Korea is no longer a lowcost location for tyre factories. 10.4 India

10.4.1 Introduction India has had an automotive industry for more than 50 years and a tyre industry for almost as long, but it is only in the last decade that the economy has begun to open up to the world industry. Until then it was very much a closed market and a restricted one at that, with all manufacturers requiring licenses and tight controls placed over production volumes by central government. In 1991 these controls were loosened, and there has been progressive deregulation since then. This has had the effect of attracting many new vehicle assembly operations and in consequence many of the multinational tyre manufacturers have shown a new or renewed interest in the country. These developments in the Indian tyre industry have not been painless for the existing manufacturers. Many of them have grown to a substantial size; indeed four of them are in the “Top Twenty” producers worldwide. However both the Indian market and the world market are changing rapidly and some companies, particularly the smaller ones, are finding it difficult to come to terms

109

Light Vehicle Tyres

with the changing circumstances whilst others are seeking new opportunities both within India and in the export market. Of the 47 tyre factories in India four are currently shut down. The tyre industry has doubled its output since 1992 to 51.5m tyres in 2003 but this figure is rather misleading as most of these are two-wheeler tyres. Passenger car tyres only represent about 17% of the total though it is in this area that the real interest lies. Whichever coalition is in power, the general opening up of the Indian economy is likely to continue, and this is not just because of the developments in the global economy. India is big enough to be able to resist these changes if it sets its mind to such a course, but over the last decade regional parties have become much more influential in Indian politics as the power base of national parties such as Congress has crumpled. In general these regional parties are investor-friendly. Under the old command system of socialism the central government in Delhi decided who could invest how much and where. However, deregulation since 1991 has created competition between the states in attracting investment from within India as well as from foreign business. Having tasted economic power, the regional parties are now determined to retain it. However, despite the huge market it represents, India does not yet present an attractive destination for automotive related industry. It is more attractive than it was ten years ago, but most of its regional neighbours have done much more to increase their relative attraction. Of the 16 countries in the east Asian region, the Economist Intelligence Unit (EIU) ranks India in the bottom quartile and it is not making the key reforms that would alter its attraction to foreign business. Change is taking place, but only very slowly.

10.4.2 Market With an annual value of almost US$3bn, the Indian tyre market is significant by any standards, but it is unusual in the balance of products. In most countries passenger car tyres are the most significant product, but in India production of these is dwarfed (in value terms) by output of truck and bus tyres. Moreover, in terms of sheer numbers, far more motorcycle and scooter tyres are manufactured than any other type. The balance of products in the market is shown by production figures in Table 10.6. Table 10.6 Product mix in the Indian tyre market 2003 Product Quantity (million) Truck and bus 9.9 Passenger car 8.5 Light commercial 2.8 Jeep 1.4 Tractor (front) 1.1 Tractor (rear) 0.8 Tractor (trailer) 0.5 Animal drawn cart 0.5 Scooter 9.9 Motorcycle 15.7 Moped 0.2 Industrial 0.3 Off road 0.1 Total 51.6 Source: ATMA The light vehicle sector consists of passenger car tyres and light commercial tyres. In the context of the international market Indian jeeps would not be classed as using this type of tyre.

110

Light Vehicle Tyres

Looking at light vehicle tyres more closely, the market is rather smaller than simple production figures would suggest as some of these tyres are exported. Table 10.7 Indian market for light vehicle tyres 2003 Production (million) Less exports (million) Market (million) Passenger car 7.5 0.3 7.2 Light commercial 2.4 0.6 1.8 Total 9.9 0.9 9.0 Source: ATMA original data In total the Indian market for light vehicle tyres is smaller than South Korea but it is still an attractive market for international producers because it is a much more varied market than just tyres for light vehicles and it is growing rapidly. In the last decade production rose dramatically at first with an annual average growth rate of 11%, and then the new automotive plants stimulated demand. However, since 1996 the growth rate has slowed significantly, despite the high expectations. 2003 seemed to demonstrate renewed growth of 19% but this is unlikely to be repeated in the short term (Table 10.8). Several manufacturers have anticipated growth and made significant investments but they are likely to be disappointed. Even Michelin has reneged on an announcement to build a new greenfield factory and instead has decided to form a joint venture with Apollo Tires. Table 10.8 Indian tyre production 1992-2003 1992/93 21.9 1993/94 24.4 1994/95 28.6 1995/96 30.7 1996/97 32.4 1997/98 33.9 1998/99 37.0 1999/2000 41.4 2000/01 42.4 2001/02 43.5 2002/03 51.6 Source: ATMA Most sectors have shown some growth over the last five years but the real growth has been concentrated on motorcycles and passenger cars. Truck and bus tyres, which comprise 62% of the industry by value, have grown very little. In the early years of the last decade exports grew strongly, a mark of a robust industry. Unfortunately these have shown signs of levelling off in recent years, for two reasons. Export markets were showing a preference for radial tyres, a product which Indian tyre makers had largely ignored, and the exporters have faced increasing competition from rivals in southeast Asia and especially China. However, the industry is fighting back as it now makes significant numbers of radial tyres for passenger cars and certain exports grew significantly in 2002 and 2003. Over the last decade the output of the industry has increased by 180%, whereas exports have increased ten times. In 2001/02 exports amounted to 7% of total output and 10% of light vehicle tyres. Of this North America accounted for 20% and the remainder was mainly targeted at the Middle East and southeast Asian countries. Traditionally, cross-ply tyres have dominated the Indian market. Originally this was because radial technology was new and few companies saw the need to invest in manufacturing these tyres when they could sell all the cross-ply that they could make. However, two other factors have maintained the dominance of cross-ply tyres in the market place. Radial tyres initially cost about 30% more than cross-ply tyres – a significant premium in a country where the average annual income is about

111

Light Vehicle Tyres

US$250. This premium has now shrunk to about 15-20% but is still a deterrent. Even more important though is the generally poor state of the roads and the endemic overloading of vehicles. A vehicle designed to carry 9 to 12 tonnes frequently carries up to twice that load and bias (crossply) tyres are much better at withstanding this type of abuse. This situation is changing as the multinationals have entered the market and the indigenous companies have changed their product mix to accommodate the new automotive production. Six of the major tyre producers already in India have made considerable investments in radial production, including all the biggest companies – MRF, Apollo, Ceat, Modi, JKI and Goodyear. In total this amounts to capacity for an additional 8m tyres. However, the investments have proved to be somewhat premature – all manufacturers now have surplus radial tyre production capacity. Despite this there are no real regrets, as each company is merely taking precautions to ensure that they do not lose market share when demand really does take off. There are signs now that this longpromised take off is now becoming a reality. There is a gradual but accelerating move towards radials because of the influx of new cars, but estimates differ as to how fast this is proceeding. The key was the adoption by Maruti of a radial tyre as standard, as this company accounted for over 70% of all new cars assembled in India. By 1997 radial tyres for passenger cars accounted for about 30% of production, up from a mere 8% in 1990. However, domestic demand lagged behind the pattern of production so some of the radials were exported. Nevertheless, both the tyre companies and the retail trade promoted radials vigorously because of the higher margins. In 2003 it is estimated that 75% of the passenger car tyre market (PCT) is accounted for by radial tyres as all new cars now have these fitted as standard (Table 10.9). Customers replacing tyres on these cars now choose radials automatically and it is estimated that 85% of the PCT market will be accounted for by radials by 2006. The final 15% will take a long time to convert as there is a large park of old Ambassadors and similar car models that will require cross-ply tyres until they are finally scrapped. Table 10.9 Spread of radialisation in India 1996-2003 Truck & Bus (%) Light commercial (%) Passenger car (%) 1996 1 3 28 1997 1 5 31 1998 1 5 37 1999 1 6 49 2000 1 7 51 2001 2 8 65 2002 2 10 70 2003 2 10 75 Source: ATMA & Bowfell

10.4.3 Supply Structure According to official records, the tyre industry in India comprises of 40 tyre companies, operating 53 factories. However, many of these are not operating and 12 companies account for over 85% of total unit production. Capacity utilisation is estimated at 72% across the industry. The industry began with subsidiaries of western companies but after independence many of these withdrew from the market and local companies took over their operations. For many years the Indian market was insulated from the outside world and these companies concentrated on supplying their home market, though they bought in technical assistance from time to time both from equipment suppliers and from manufacturers such as Pirelli which were willing to sell technology. In the last two decades the Indian market has gradually opened itself to influences from the outside world and in the last ten years this movement has gathered pace as the government has gradually freed the economy.

112

Light Vehicle Tyres

This opening up of the market and the move towards higher technology has contributed to the increasing interest of the multinational tyre producers, but the real catalyst has been the establishment of vehicle manufacturing plants. Until then Goodyear India struggled for years to make its presence felt in the market, but it is still outside the top five. Michelin was forced to sell its stake in MRF some years ago by the management of the Indian company. However, these experiences have not deterred a renewed interest in the market. Goodyear established a 50:50 joint venture with Ceat, South Asia Tyres, to concentrate on radial production but bought out its partner in 1998 because there were conflicting strategies. Continental has examined various ventures in recent years but has settled for providing technical assistance to Indian partners. It now has links with JK Industries, Apollo Tyres, Modi Rubber and Metro Tyres. The agreement with Metro was announced in October 2002 and involves the Indian company manufacturing motorcycle and scooter tyres under license. These will be sold under the Continental brand name, with 300,000 units targeted for 2003, rising to 1.5m tyres by 2007. Bridgestone announced that it was entering the Indian market in early 1996 by way of a 51:49 joint venture with India’s Associated Cement Companies. The original plan was to produce 2m steelbelted passenger car radials each year. The plant at Khera in Madhya Pradesh began production in March 1998, but the downturn in the market scaled back production plans. In addition the two Indian partners, ACC and Tata Engineering Locomotive, scaled back their commitment to 26% from 49%. Bridgestone’s share has risen to 64% and Mitsui and Co has taken up the remainder. Despite the curtailed ambitions Bridgestone has made a success of its market entry and it has been able to develop the perception that it is a high quality brand. In consequence it can now charge a premium for its tyres, something that Goodyear has never been able to achieve in this market. For a long time Michelin was the only one of the Big 3 without any direct involvement in the Indian market but it was not for want of trying. It has had discussions with almost all possible partners but eventually decided to enter the market on its own with a greenfield site. It had almost chosen a suitable location in 1998 when the problems in the economy ruined the business case that had been constructed. In 2003 it finally came off the fence and announced a joint venture with Apollo Tyres, at the same time taking a 15% equity stake in Apollo. The official reason for this investment was that Michelin now thought the market for radials was large enough to justify the investment, but it is likely that it thought a joint venture with a local company would be both easier and safer than a ‘go it alone’ strategy. However, this entry into the Indian market initiated some marked reactions among its competitors. The company most directly affected was Continental which had had very close technical agreements with Apollo. These were immediately terminated and Continental is now thought to be discussing an equity link with JK Tyres, one of the other leading Indian players. Even if this does not materialise, Continental has detailed knowledge of other Indian companies such as Metro. Both Goodyear and Bridgestone responded by increasing their investment in manufacturing and Bridgestone took the opportunity of a relaxation of the law to increase its holding in its subsidiary to 100%. Pirelli is believed to be discussing making its present arrangement of tyre supply with Ceat into a closer relationship. MRF, the largest indigenous company not involved in talks with the multinationals, announced that it too was increasing its investment. At present the largest firm in India is MRF, followed by Apollo and JK Tyres which are very similar in size. These are followed by Ceat and, some way behind, Birla and Modi. According to Goodyear, “India is one of those markets where medium-sized players will co-exist with the larger ones. It probably is not going to be a scenario where the big four dominate the market. What we do see, however, are more technology partnerships.” A more likely interpretation of the recent changes in the market is that, with the loosening of regulations in the economy, the larger and more successful are looking to develop close relationships with the multinationals to help them with their technology and to build up their export markets. In return the multinationals gain a foothold in the Indian market – one of the largest in the world and certainly one of the fastest growing. It is to be

113

Light Vehicle Tyres

hoped that this new realism in the Indian market will improve companies’ efficiency as, even in good times, profits rarely exceed 3% of turnover. This might be just in time as the country is beginning to see tyres imported from China as a threat. They are considerably cheaper than home-produced tyres because the Chinese have access to lower cost rubber and cheaper labour. One of the biggest competitive advantages, however, is the lower cost of finance in China. Indian companies have to pay much higher interest on loans and it is difficult to get long-term loans at fixed rates whereas the Chinese companies have ready access to adequate low-cost finance.

10.4.4 Retailing The Indian market is huge in geographical terms but hindered by poor infrastructure. Although there is an extensive railway network the highways are inadequate, crowded and generally in a poor state of repair. As a result it is very difficult to achieve a truly national presence though improvements in the road network and a realisation by the companies of the value of a national network are changing this situation rapidly. The key elements in the distribution are clearing and forwarding agents (C&F – effectively wholesalers), multibrand dealers and exclusive dealers. C&F agents act as a stocking point for a company’s tyres at a particular location in the market. They supply the dealers and also provide credit. Exclusive dealers are committed to one manufacturer and some manufacturers have made a policy of encouraging exclusive dealers. MRF, JK, Ceat and Goodyear probably have the largest networks of exclusive dealers. This can be a major advantage in terms of displaying product but the companies which use multi-brand dealers counter this with various promotional measures aimed both at the dealer and the customer. The mechanics in the workshops have a real influence over which tyre a customer chooses and they are often included in these incentive schemes. Despite the advantages of close collaboration with the manufacturer the exclusive outlets are losing market share and a number of these are now going over to a multi-brand strategy. The market end user is becoming far more sophisticated and is demanding a better choice. Education is helping develop awareness and the continual publicity about radial tyres is making every user more conscious of their tyres. JD Power is now conducting surveys of customer satisfaction in India and both MRF and Bridgestone have come out well. 10.5 China

10.5.1 Introduction China has become the Great White Hope for the tyre industry, like many other global industries, in the last fifteen years. It is a land of superlatives – enormous population providing a potentially huge market as well as a source of unlimited cheap labour. China’s progress since it first opened to foreign investment and reform in 1978 has been dazzling. Over the past 25 years, its real gross domestic product has expanded at an average of 9% per year. Growth in foreign trade has averaged 15% annually since 1978. China’s trade surplus with America is now twice the size of Japan’s. China’s economy is now well integrated with the rest of the world and it is the sixth largest with a GDP of $1.4 trillion. That has been the overall achievement but the reality for individual western firms has proven much more difficult to achieve. Most of the big multinational tyre suppliers are now established in joint ventures in China, but progress has been slow and difficult and it is likely that continued development will take a considerable time. Just as the automotive industry is now having to adjust to reality after the first flush of enthusiasm, so too is the tyre industry. The expatriate companies are experiencing the nature of the Chinese market and the Chinese companies are beginning to adjust to the competitive threat posed by the newcomers.

114

Light Vehicle Tyres

According to the Ministry of Chemical Industry, there are over 100 tyre factories in China in the commercial sector. In addition, the Chinese People’s Army, which in many ways is a state within a state, operates more factories for their purposes, although it is under pressure to give up its industrial interests. Many of these establishments would not be recognised as tyre manufacturing plants by western companies. They were originally developed as part of a nationwide policy to make all regions selfsufficient. Although the Chemical Ministry gave authorisation for all the commercial plants (nonArmy), only the larger plants were established and controlled by the central government. The smaller plants have always been the responsibility of regional government. Every major city or regional centre had its own rubber company to supply local needs, and these plants would produce everything made from rubber, ranging from shoes to farm tyres. This policy proved disastrous, with wide variations in quality and uneconomic production runs, quite apart from the lack of technical development. Inevitably many of these plants began to specialise, and those concentrating on low technology consumer goods became much more successful producing, for example, shoes for the export market. Tyres needed a much higher technological input, and most operations did not have the resources for this input as they were working from a very low technological base. An attempt was made by the Chemical Ministry to upgrade some of these factories. The larger companies came directly under the control of the Ministry in the early 1990s and were classified as strategic suppliers. However, the regional governments were loathe to see part of their responsibilities taken away, and wherever possible they tried to maintain control and on occasions encouraged these plants to develop by making direct contact with western companies.

10.5.2 Market The development of passenger car production in China is relatively new, and consequently the current production of tyres is strongly influenced by the composition of the vehicle parc where there is a predominance of commercial vehicles and two-wheel personal transport. As a result, tyres for commercial vehicles dominate total production. Passenger car tyre sales are growing rapidly, but they still only account for a minority of production (Table 10.10). Table 10.10 Tyre production in China 2003 Product Million units Truck tyres 72.5 Passenger car 22.3 Farm & industrial 27.6 Motorcycle 19.8 Bicycle 126.0 Total 268.2 Source: Industry estimates Of the 95m vehicle tyres, about 10% are for OE use, a further 33% are exported and the remainder are for the replacement market. Production is spread throughout the whole country, but passenger tyre production is concentrated in the coastal provinces, particularly in the regions around Beijing and Shanghai. In contrast, agricultural tyres are mainly produced in the inland provinces. Trucks of all sizes are the ubiquitous means of commercial transport, and tyres for these are made in all regions. However, the large companies account for the bulk of production. This proportion is becoming greater, as the small companies find it difficult to compete and are gradually exiting the industry or concentrating on niche markets.

115

Light Vehicle Tyres

One of the major advantages of large firms is that they have been able to introduce western technology, and this has brought a rapid rise in the production of radial tyres. This has been the particular case with passenger car tyres as the vehicle manufacturers insisted on this specification for vehicles assembled in China. This in turn gave a halo effect to the technology and influenced the replacement market. Currently about 90% of the passenger car tyres produced for the Chinese market are radials, and that figure should reach 100% by 2005. However, a significant number of cross ply tyres are still made for export by the smaller and less sophisticated manufacturers. The market for tyres is growing rapidly at about 6-7% per year, but there are too many manufacturers and they are all trying to survive. As a result there is a glut of tyres, many of them of poor quality, and no one appears to be operating profitably. The western multinationals have the advantage of being able to charge a significant premium, usually about one-third more than indigenous brands, but they are still not profitable. They at least have considerable financial reserves and are determined to stay in the market for the long haul, but the Chinese companies are not without resources. Their local governments, which are usually majority shareholders, are keen to retain these companies as major local employers, so they encourage high levels of production. It is these firms that are mainly responsible for the glut of tyres elsewhere in Asia, with Chinese imports often undercutting prices of locally produced tyres by 30-40%. The entry of China into the WTO has exacerbated this competition in the market, but it is a situation that cannot last. The smaller companies will eventually fade out of the market, but it will take several years for this to happen and they are likely to continue operating unprofitably in the meantime.

10.5.3 Supply Structure Chinese tyre factories fall into three broad groups. The majority are still old, traditional local factories. A typical example would have a collection of buildings in a walled compound, often a long way from good communications. Each building carries out a separate processing operation – curing, mixing, tyre building, etc. Conditions are usually quite primitive, with poor construction, flooding at times of rain, no heating and a disorganised workforce. There is often a lack of warehousing, and tyres ready for shipment are stacked in the open air. Some of these establishments are quite large and have a substantial sales turnover, despite the manufacturing conditions, but the quality of production varies tremendously even within a single batch, and the technology of the tyres is very low. The second group is comprised of about a dozen factories that have recognised their problems and purchased western machinery in order to improve the processes. Usually these were regional plants with ambitious regional government owners wanting to develop their own local industry independently of the Chemical Ministry. A number of western companies were prepared to sell equipment to these factories, but it was invariably a simple sale – no joint venture or technical agreement was established. Typically these plants are in new buildings close to one of the old factories and they cost US$100m-US$120m to build and equip. However, although the equipment is new, the technology is not; it was out of date when the machines were first installed. All of these factories have a capacity of between 500,000 and 750,000 tyres per year. Viewed from a global tyre industry perspective, this size of plant is just not large enough to be economic, and the position is made much worse by the large debts that have been incurred and which now have to be serviced. In the words of one observer, they are ‘too big to die and too small to live’. A modern tyre factory needs to produce at least 3m tyres each year in order to achieve economies of scale. Low labour costs in China do not affect these economic facts of life to any great extent, as the main expense is capital investment. Although some of the equipment in these turnkey factories is capable of much larger throughput, there are often bottlenecks in the process line, such as an

116

Light Vehicle Tyres

inadequate extrusion line or too few tyre building machines. All of these plants are burdened with so much debt that they are effectively bankrupt, and many have ceased production. One company even obtained OE approval from one of the western vehicle manufacturers, but despite this, it has not been able to supply any OEMs in China because it cannot produce on a regular or consistent basis. The machinery cannot be sold as the debts are on the books and they would have to be written off. This would cause great loss of face and possible recriminations. The companies are too small, too burdened with debt and too inefficient to compete with modern plants, so the only solution would appear to be finding a joint-venture partner. Unfortunately almost all the multinational firms wanting to get established in China have already found partners. A number of other Asian companies are also looking for Chinese production facilities, but they are unlikely to want to get involved with heavily indebted companies. The third group comprises both Chinese and western companies: the large domestic Chinese companies which have been identified by the Chemical Ministry as key companies and western companies which have established plants in China, either as joint ventures or as sole investments. In the list of the largest 75 tyre companies in the world published by Tire Business there are 17 Chinese tyre manufacturers plus a further 5 from Taiwan (Table 10.11). Table 10.11 Major Chinese tyre manufacturers World ranking Company Tyre sales ($m) 2002 12 Cheng Shin (Taiwan) 646.5 13 Shandong Triangle Group 629.5 14 Shandong Chengshan Tire 525.0 (est) 18 Grandtour Tire 371.3 22 Shanghai Tyre & Rubber 257.1 23 Qingdao Rubber Group 252.2 26 Hangzhou Zhongce Rubber 236.0 28 Kenda Rubber (Taiwan) 229.4 30 Qingdao Huaqing Tyre 222.0 34 Guizhou Tyre 187.2 37 Henan Tyre 164.5 41 Hwa Fong (Taiwan) 142.1 45 Shandong Linglong Rubber 133.5 50 Nankang Corp (Taiwan) 125.9 52 Federal Corp (Taiwan) 124.3 54 Yinchuan CSI 113.8 58 Dong Fen Tire 91.8 63 Double Happiness Tyre 71.8 64 Pearl River Tyre 69.8 65 Hualin Group 68.6 73 Shandong Zhongche Tyre 48.3 Source: Tire Business Not all of the companies in the table are regarded as key companies by the Chinese government; in fact it does not expect more than five or six to survive as internationally competitive in the longer term. China recognises the need to reduce the state’s role and to build up the private sector as it moves away gradually from central planning towards a market-based economy. It sees many state firms as unable to compete unless they shed themselves of government management. However, this is complicated by the fact that although central government sets the overall policy, it is usually the provincial governments that own the companies. In the past the central government and some of the provincial governments have sold off some shares, either privately or by allowing the companies to

117

Light Vehicle Tyres

list on the stock exchange, but they have still retained control. More recently share sales have been aimed at making a meaningful dent in government control of these companies. For example, Shanghai Tyre and Rubber, one of the larger Chinese companies, is now largely independent. Quoted on the Shanghai Stock Exchange, it is forming partnerships with multinationals (first Bridgestone and then Michelin) and linking up with Chinese competitors to develop overseas markets. It joined with Guizhou Tire and Xuzhou Tire to buy a Californian importer of tyres, CMA. However, it made inappropriate investments for expansion and made several years of losses, so it is now going through a consolidation phase. Guangzhou (Pearl River) Rubber, a much smaller company, is now majority-owned by two Malaysian-based companies with listings in Australia and Hong Kong, although Guangzhou municipal government still retains a 30% stake. This also illustrates the increasing involvement of the Chinese diaspora in industrial ventures in the homeland. The Hangzhou Zhongce Rubber Co. has come to an agreement with Cooper Tire in the USA to manufacture certain sizes of tyre for that company. In 2004 it will produce about a million entry level passenger car radial tyres for Cooper as well as a smaller number of light truck tyres. Rather than exporting under its own brand it has entered into this contract with Cooper. The significance of this is that it demonstrates the quality capability of the larger indigenous companies. Hangzhou Zhongce is part of China Enterprises, formerly China Tire Holdings Ltd. It considers itself the largest producer of bicycle tyres in China. However, Cooper is building its own plant in China, in conjunction with Kenda Rubber of Taiwan. This is due to open in 2005 and Cooper may then be able to source all its requirements from its own plant. The Taiwanese companies are obviously not controlled by the Chinese government but they are important as they often have close links with the mainland and in a few cases actually manufacture there. Cheng Shin, the largest Taiwanese manufacturer has three factories in China making both passenger car tyres and motorcycle tyres. Indeed Cheng Shin claims that its Kunshan plant is the largest in China with a capacity of 8 million tyres. It is these small- and medium-sized companies that are causing the most concern in international markets at present as they are taking advantage of the low labour costs and relatively cheap interest rates to build up exports. In some areas, particularly other Asian markets, this is disturbing the current equilibrium, as these exports are severely undercutting local products. Little attempt is made to develop brands or to produce consistent quality, but this is of no consolation to the firms that are under pressure from the competition. Many of the other companies are moving forward as they recognise that they must either expand or be taken over. However, public relations is not yet a skill that has been absorbed by many of these companies and information is both sporadic and inconsistent. In contrast the western companies are very good at public relations but they too are strangely reticent about their activities in China. Most companies took a long time to establish partnerships in China, partly because they had to feel their way into an unknown market and partly because the negotiations were difficult, with the Chinese companies often having rather an inflated idea of their own contribution. The agreement between Goodyear and Dalian Rubber General Factory in 1994 was a breakthrough, and since then most of the major multinationals have established ventures in China, although they have often encountered problems, and few of them are making a profit, even now. Goodyear appeared to have made a favourable agreement, as it was not only allowed to take a majority (75%) share in the venture, it was also allowed to market one of its own brand names in China. However, perhaps building on this, both Hankook and Kumho of Korea established joint ventures with a higher level of control. Bridgestone and Michelin were much more cautious in entering the market, and it was not until 1999 that Bridgestone bought a majority stake in Shenyang Santai Tire Co., which produces radial

118

Light Vehicle Tyres

tyres for trucks and buses, although it had bought several other non-tyre rubber companies in China before that. Six months later it took advantage of Kumho’s financial problems to buy out one of the two plants Kumho had established. This was a brand new plant with a capacity for 3.5m radial passenger car tyres and a network of sales outlets, so it was a shrewd purchase by Bridgestone. It has now gone further and is constructing a third, wholly-owned plant in Wuxi, due to open in late 2004. Michelin’s first venture into China was in 1996 when it formed a joint venture with Shen Yang Tyre Factory in Liaoning in northeast China, relatively close to Beijing. This was quite a small operation with a capacity of about 1m mixed tyres each year, but Michelin kept talking to other Chinese manufacturers, particularly Shanghai Tire and Rubber, at the time the biggest indigenous tyre manufacturer. In 2001 it agreed a 70:30 joint venture with Shanghai that took over some of Shanghai’s productive assets including a passenger car tyre plant, a steel cord plant, land use rights and the Warrior brand name – a business with a turnover of US$80m. The two companies put a further US$80m cash into the joint venture and guaranteed debt and other finance. Michelin is supplying radial tyre technology to the joint venture and establishing an R&D facility in Shanghai to support its development. Hankook and Kumho of South Korea were early investors in the Chinese tyre industry although Kumho had to curb its ambitions when it ran into difficulties and sold one of its plants to Bridgestone. Since then the company has recovered somewhat and it has confirmed its confidence in the Chinese market by commissioning a further plant. Hankook already has two operations in China and it is investing 250 million US dollars in the two plants by 2010, thereby tripling annual production capacity to about 20 million units, The Japanese companies have also committed large investment in Chinese manufacturing plants. The first investor was Toyo with a joint venture with Cheng Shin on the Chinese mainland but it has since been followed by Bridgestone (with three plants), Yokohama and, most recently by Sumitomo.

10.5.4 Retailing The multinationals have not just built factories in China but they have also had to establish retail networks from scratch as these hardly existed in China. Each of the companies has set up distribution points feeding a network of distributors but no one has attempted to cover the whole country. Most are concentrating on the coastal provinces, partly because that is where the factories are based but, more importantly, because this is the area with the most income. The average per capita GDP in these provinces is $2200 compared with a figure for inland China of $750. No doubt the networks of distributors will eventually stretch across the whole country but for the present the companies are concentrating on the areas where there are cars in use. Yokohama is typical in that it has already built a network of 148 distributors and 1,018 retailers, and aims to have 1,200 retailers in the thriving Yangtze Delta by the end of 2005. Sumitomo Rubber Industries is a newcomer to the market but it intends to establish a sales network of more than 400 stores in order to achieve its sales targets. These, however, are independent dealers with no long term commitment to the company. Bridgestone is adding to its existing network of independent dealers by establishing over 200 company owned stores by the end of 2006. The company opened its first tyre store in Guangzhou in 2003 and is designing the new stores on the basis of what it learned from that operation. Even with its economy slowing, China is still a very popular business destination. However, doing business in China is far from easy and often not very profitable. An increasing number of joint ventures and other types of collaboration are turning sour. For example, a proposal for Shell, Exxon and the Russian firm Gazprom to build a pipeline with PetroChina fell apart. After three years of difficult negotiations the two international firms had to walk away from the deal leaving enormous detail of their designs, field-development and technology.

119

Light Vehicle Tyres

Similarly Thames Water pulled out of a waste water plant it had built and was running because the fixed annual return on investment that had been agreed was now declared illegal. There are, of course, overseas firms making good profits in China but there are still too many problems, not just for new businesses but also for firms that are well-established and which think they know the local market. Some of the worst problems are: • • • • •

Navigating the country’s opaque bureaucracy and maze of ever-changing rules Finding trustworthy local partners Understanding that Chinese officials at the highest level believe that foreign firms deserve little in return for their investments Piracy Fraud

These problems have been in existence for a long time and improvements, if any, are being introduced only very slowly. They continue to take up more time, energy and money than in any other major market. The global tyre manufacturers have been slow to enter the Chinese market but their problems are far from over now that most of them have joint ventures and are producing tyres in China. Many of them will use their Chinese facilities to make tyres for export but they will also want to establish a presence in the Chinese market. This is the area that will prove most difficult for the western tyre manufacturers, even though the market is growing so rapidly.

120

Light Vehicle Tyres

Abbreviations and Acronyms AIMST APU ATMSS ATV BIRD BLIC BR C&F CAGR CCM CIS DAE EIU ELT ELV ETRA FOA GDP HBU HP IIR IMPACT IR ISTEA ktpa MIRS MMP MOSS NAFTA NHTSA NR NSBR NTB OE OEM OENR PAH PCT REACH RFID RMA RV SBR SUV SWT TDF TPMS TREAD UHP USP VIN WTO YFC

Automated Inspection Modular System Technology Advanced Processing Unit Automated Tire Manufacturing Synchronised System all-terrain vehicle Bridgestone Innovative and Rational Development Bureau de Liaison des Industries du Caoutchouc butadiene rubber cleaning and forwarding compound annual growth rate Continuous Compound Mixing Commonwealth of Independent States distillate aromatic extract oil Economist Intelligence Unit end-of-life tyres end-of-life vehicle European Tire Recyclers Association Flow Oriented Approach gross domestic product heat build up high performance halogenated butyl rubber Integrated Manufacturing Precision-Assembled Cellular Technology isoprene rubber Intermodal Surface Transportation Efficiency Act kilotonnes per annum Modular Integrated Roboticised System Modular Manufacturing Process Market Oriented Sector Selective North Atlantic Free Trade Area National Highway Transport Safety Administration natural rubber styrene-butadiene terpolymer National Tire & Battery original equipment original equipment manufacturer oil extended natural rubber polycyclic aromatic hydrocarbon passenger car tyre market Registration, Evaluation and Authorisation of Chemicals radio frequency identification Rubber Manufacturers Association recreational vehicle styrene-butadiene rubber sports utility vehicle sidewall torsion tyre-derived fuel Tyre Pressure Monitoring Systems Transportation Recall, Enhancement, Accountability and Documentation ultra-high performance unique selling proposition vehicle identification number World Trade Organization Yokohama Franchise Center

121

Light Vehicle Tyres

122

ISBN: 1-85957-484-X

Rapra Technology Limited Rapra Technology is the leading independent international organisation with over 80 years of experience providing technology, information and consultancy on all aspects of rubbers and plastics. The company has extensive processing, analytical and testing laboratory facilities and expertise, and produces a range of engineering and data management software products, and computerised knowledge-based systems. Rapra also publishes books, technical journals, reports, technological and business surveys, conference proceedings and trade directories. These publishing activities are supported by an Information Centre which maintains and develops the world’s most comprehensive database of commercial and technical information on rubbers and plastics.

Shawbury, Shrewsbury, Shropshire SY4 4NR, UK Telephone: +44 (0)1939 250383 Fax: +44 (0)1939 251118 http://www.rapra.net