China Tiremaker Consolidation Impacts World

A couple of months ago we discussed the “restructuring” of relatively large and modern Chinese manufacturer Deruibao Tire. Back then, Qingdao Doublestar was top of the list of firms connected with an acquisition/cooperation/merger rescue orchestrated by the local government. A month later government-owned ChemChina announced that it was buying Pirelli Tire. This latter point has been covered in some depth in the pages of Tyres & Accessories, especially in our April edition.

The Pirelli/ChemChina story will no-doubt garner more attention as the very complex outworkings of the deal are walked out, but what remains of interest is the way in which both the local Chinese market and the global industry are engaged in a period of both parallel and interconnected consolidation.On the global scale, as we discussed in April’s magazine, there are a number of large manufacturers that remain potential merger and acquisition targets ranging from Cooper all the way up to Goodyear. There has even been talk of a competitive counter offer for Pirelli – although this always sounded far-fetched.

What’s interesting is that – so far – what are often if somewhat imprecisely called the ‘emerging’ or ‘developing’ markets have played key roles throughout. In the case of the halted acquisition of Cooper a couple of years back, growing Indian player Apollo’s bid was brought to an end by Cooper’s Chinese joint venture partner Chengshan, which wanted to bid for Cooper itself. Now ChemChina/Aeolus is well on the way to buying Pirelli and there is even talk of other Chinese bidders in play.

On a domestic level, the de facto merger of Sailun and Jinyu ran in parallel with the growth of the largest Chinese players, pushing already-ambitious players towards intra-market consolidation. We have discussed the reasons why some tire factories have and are failing China owing to oversupply and poor value strategies before, but the local competitive environment is also another key factor.

To put it in perspective, a firm that was fourth or fifth largest in China five years ago is now probably 10th or 11th on the rankings. They are also probably at least partly state-owned. The fact that tire factories are failing and the fact that state-directed manufacturers have, in some cases, been out-grown by forward thinking and more commercial competitors mean that the next wave of domestic Chinese consolidation will be by merger and restructuring rather than by greenfield investment or even traditional acquisition. In this respect what is happening in China locally is mirroring what is happening further up the table with the world’s largest tiremakers.

At the time of going to press, Tyres & Accessories came across reports of the closure of another factory, which has produced tires and private brands for a number of European wholesale operations. Of course, there was the inevitable talk of now being a good time to buy-in stock produced at this East China plant while it is being sold off, but with Chinese tire managing directors no longer talking about how quickly they can build factories in favor of buying or at least acquiring them, the strategic implications of such closures become more interesting.

For anyone asking what this has to do with Europe and the rest of the world? Don’t forget a top five position in China pretty much puts you in a top 20 position in the world. And when we consider that the import duties in the U.S. are pushing tire volumes to Europe, especially southern Europe and the U.K., this means such developments potentially impact us all.

In addition, as we have seen, the global picture echoes the Chinese domestic one and the world business is inextricably connected to this market. The recent confirmation that leading Japanese and South Korean firms Yokohama and Kumho are exploring ways to work together more closely only goes to emphasize this point. Not only are the companies considering “gradually expanding shipment volume” they are doing so, a) to meet demand for OE volumes, and b) to improve utilization rates at Kumho’s Chinese factories.

Once more, Chinese over-supply is having a direct impact on global markets and could even be pushing some together. The latest is that deliveries along these lines could start within the year.

Nevertheless, while these two firms are clearly working together more closely than ever, there are still those that are expecting another big change at the top of the tire rankings. As one tire executive told Tyres & Accessories prior to this issue’s deadline – “Goodyear will be next…”

This isn’t the first time such a view has been espoused, with INSEAD’s Karel Cool having made the same prediction in mid-March. The proof of the pudding, as always, is in the eating.