Impact of Chinese Truck Tires on Fleet Aftermarket

On June 12, the U.S. government imposed added duties on automobile and light-truck tires imported from China after finding they were being dumped at below-market value and unfairly subsidized by the Chinese government.

Specifically, the U.S. Commerce Department set duties, in some cases exceeding 100 percent, on tires from companies such as Shandong Yongsheng Rubber Group Co.; Cooper Kunshan Tire Co., a subsidiary of Cooper Tire & Rubber Co.; and Giti Tire (Fujian) Company Ltd. This is not the first time the U.S. government has imposed tariffs on Chinese tires – the first was in 2009.

Tires are a global commodity. Half of the hundreds of tire brands sold in the U.S. are sourced from China. Nearly 25 percent of light-truck tires, and 33 percent of the medium-duty truck tires sold in the replacement tire market are manufactured by Chinese companies. Similar to the U.S. market, China is a major player in truck replacement tire markets throughout the world, holding double-digit market shares in every market. China’s share of the European market for light and medium truck tires is 23 percent, Latin America 27 percent, and Africa 72 percent.

The influx of Chinese truck tires into the U.S. fleet market is also having a detrimental effect on the tire retreading industry, because many of these “bargain” tires cannot be retreaded. Many Chinese tires do not come with a casing warranty, which makes companies squeamish about retreading.

Overcapacity Is the Root of the Issue

One factor driving the deluge of Chinese tire exports is the country’s immense tire production overcapacity generated by 508 domestic tire manufacturers producing a variety of products, ranging from motorcycle, auto, truck, and bus tires. Chinese tire exports increased tenfold between 2000 and 2013. More specific to the focus of this article, truck tire production in 2015 grew to 120 million tires, with an overcapacity rate of almost 25 percent.

One unintended consequence of U.S. tariffs is that Chinese tire OEMs reallocate their tire exports to other markets, such as India, where Chinese tire imports have increased 10-15 percent, severely impacting the Indian domestic tire industry. Chinese truck tire imports are also rising in Europe, capturing an ever larger share of a European replacement tire market for trucks, according to the European Tyre & Rubber Manufacturers’ Association (ETRMA).

In addition to the U.S., Europe, and India, other major export markets for China’s tire manufacturers are Brazil, Turkey, Colombia, and Egypt, all four of which have accused China of dumping its excess capacity in their domestic markets. All these nations, at varying times, have imposed tariffs on Chinese tires.

One reason China tire manufacturers have focused on the replacement tire market is because of their difficulty penetrating the OE market, where tires are sold directly to auto manufacturers for vehicle assembly. However, this dynamics may change. In 2015, China’s state-owned ChemChina acquired Pirelli, the fifth largest tire manufacturer, giving it a foothold in the OE tire market by becoming a major supplier to BMW, Mercedes-Benz, and Ford.

Chinese Dynamics Influencing Commodity Prices

China manufacturing overcapacity is also exerting a strong influence on the prices of commodities used to produce tires. For instance, steel is a major component of steel-belted radial tires. With China’s slowing economy consuming less steel, its steel industry has increased exports, putting downward pressure on global prices. To illustrate the scope of overcapacity in the Chinese steel industry, in the single month of April 2015, China produced 68.9 million metric tons of steel, which was more than the combined production of the other top 64 steel-producing countries, according to the World Steel Association. For additional comparison, in April 2015, the U.S. produced 6.5 million metric tons of steel.

Oil is a key commodity in manufacturing tires, whose pricing will experience volatility with the increased volume of shale-oil supplies in North America and soon-to-be-available oil from Iran following the lifting of international sanctions. However, it is important to remember that energy demand moves in lockstep with the global economy and, with China being the largest consumer of oil, the robustness of the Chinese economy, or lack thereof, will be a major factor influencing future oil commodity prices.

The other major commodity used to produce tires is natural rubber, where excess supply in 2014 put considerable downward pressure on prices. Rubber producers must make long-term harvesting projections, since it takes newly planted trees six years to mature. Many of these production decisions are based on forecasts about Chinese economy, which is the largest consumer of natural rubber. One future factor that may put upward pressure on rubber pricing is that global vehicle production is forecast to increase by 21 million units to 106 million units per year by 2021, with China making up half the growth, according to IHS Global Insight.

Dubious Quality for Some Chinese Tire Brands

Critics argue that some Chinese tire brands don’t have the same quality standards as global brand-name tires when it comes to performance and longevity. Tests performed by Consumer Reports seem to support this perception by documenting Chinese all-season P-metric light-truck and SUV replacement tires don’t measure up to well-known brands. There are exceptions, especially with heavy-truck tires. Some Chinese heavy truck tires sold in the U.S. have a good reputation (and history) for quality and can be retreaded, such as Double Coin and Sailun.

While controlling operating costs is extremely important to truck fleet managers, it also brings to mind the adage that “you get what you pay for,” especially if it means getting only one life from a set of truck tires because they can’t be retreaded or being limited to a single retread instead of the up to five retreads typical for most brand-name casings.