Conditions ripe for European trade barriers?

It seems a bit pessimistic to start 2016 with a reference to recession. Nevertheless, when Bank of England deputy governor Minouche Shafik suggested the UK tyre industry is in the grip of recession-based consumer behaviour at the end of 2015 she highlighted an important point. The market is encountering different purchasing habits than it has before (see “UK tyre market shows recessionary behaviour” for further details of her speech). This much is true both in the UK and further afield at both the consumer and business to business level.

There have always been those willing to compromise product quality in favour of price, but – as Shafik succinctly said – “[while] we are now into the seventh year of the recovery, the frequency with which drivers replace their tyres has not returned to pre-crisis levels.” This combined with over-supply of low-cost Asian tyres precipitated by over production in China as well as low raw material costs and low transportation costs means it is a buyer’s market. However, Shafik’s data (which incidentally was supplied by Micheldever Tyres and its Protyre retail business) shows consumers are continuing to delay purchases. TyreSafe’s 2015 data shows much the same thing, adding that many are waiting to dangerously low and even illegal tread depth levels. In other words it is a buyer’s market with fewer buyers. This makes tyre sales more competitive than ever. Competition for premium tyre consumers is even greater still.

But before we begin rehashing the well-rehearsed suggestions that the BRIC (Brazil, Russia, India and China) markets; then the BIC acronym (truncated due to Russian instability); then BIIC markets (with the inclusion of Indonesia instead) are the ones to watch. It is worth remembering that, while connected, the tyre market is not perfectly analogous to macro-economic trends. Also, ‘things’ are changing.

Vietnam, Thailand and even the US are fast becoming centres of tyre production investment in light of the problems the Chinese tyre market is having internally and the pressures countries like the US are putting on externally. When Tyres & Accessories was in China at the end of 2015 there was every indication that the internal pressures are continuing to grow because, while raw materials and distribution costs remain low, over-supply, politics and an entirely different economic culture mean export sell-in prices are also low. This is, of course, unsustainable.

During 2015 a few Chinese factories – some of which were of international scale in terms of production capacity – went bust or were married with more stable local firms in the Chinese tyre business’ equivalent of shotgun weddings. These saw regional governments play the part of the angry father of the bride. Perhaps the angriest such father is Mr Shandong, to stretch the analogy almost as far as some of these companies’ seven-figure overdrafts. Shandong Province is of course home to many tyre factories of varying size, economic strength and production quality. Some global firms have operations there, some surprisingly up-and-coming firms are also based there (see Tyres & Accessories December 2015’s Reifen China review and related China coverage for further details), but the province is also home to numerous other factories and traders that are not operating at the same standards.

The point is that the Shandong provincial government is now under so much pressure – from the national government as much as anyone else – to maintain employment levels in the province, there are reports that it is going to great lengths to keep businesses going. In addition to the shotgun wedding approach outlined above, there are even rumours that the government is effectively paying factories (whether directly or indirectly) to stay open. Before we talk about the negative effects such actions are having on local European tyre markets, especially truck tyre markets, it is worth pointing out that factories based inside China are beginning to raise voices in opposition to such actions.

With all this in mind, could 2016 be the year that European authorities institute trade barriers against too-low cost imports from China as the US has done? We all know that the EU moves at a glacial pace, but could this be the year that proceedings aimed in this direction are at least embarked upon? Or will it be a problem that solves itself? Some are now saying the different provinces are appealing for a metaphorical foul (that they can’t make money competing against such alleged subsidies – direct or indirect), to the national Chinese referee.

Either way, it looks like China will take a small step out the spotlight during the course of 2016 in favour of some other fast growing economies. If Castrol Global Trade Barometer’s fastest growing trading nations data is anything to go by, we should be looking to Iraq, Vietnam, Qatar, Indonesia and Brazil as the fastest growers between 2014 and 2019. However, saying that, it would only take another deal like ChemChina’s Pirelli purchase in 2015 to return China to the spotlight this year. But for now all eyes are on what we might call different sources and different routes to market in 2016.