Why the M&A in China’s Tire Industry Cannot Work Out

Shandong province has officially released the Framework for “Made-in-China 2025” Action, in which tire is one of the eight industries with overcapacity issues.

However, the document hasn’t involve M&A as one of the solutions to tire overcapacity.

Why ?

Lacking of Conditions for M&A

Industry insiders had predicted that as China’s tire industry experiences overcapacity and increasingly fierce competition, there would be a lot of M&A activities.

If M&A cases increase, a large number of them would occur in Shandong, a primary tire producer in China.

But why the key “de-capacity” means hasn’t been involved by Shandong province in the development framework?

An industry insider reveals that the context was quite complex.

M&A has been the first choice as “de-capacity” means for an industry with excess capacity. As such means makes full use of existing capacity and prevents large-scale unemployment or company turmoil.

Industrial administrators wouldn’t neglect the means when making the planning.

However, after investigation on local tire companies, they discovered that it wouldn’t be easy for them to merge.

On the one hand, most of the excess tire capacities in Shandong are low-end capacities, no buyers would like to purchase such “rubbish capacity”, while real good capacity needn’t to be reduced.

On the other hand, the assets ownership and cross-guarantee are complicated, which make it very difficult to conduct M&A.

Under such circumstances, Shandong province has to give up M&A, the most convenient way in “de-capacity”, while making the planning.

Reluctant M&A Cases

So is it possible to conduct large-scale M&A in China’s tire industry?

Statistics from the Tire Division of China Rubber Industry Association show that there were five large-scale M&A cases from 2014.

Among the cases, more than half were reluctant mergers and acquisitions, namely one side of the parties had no other choice but being incorporated because of cash flow.

Many of the cases occurred in Dongying, a tire industry cluster in Shandong province.

In 2015, Deruibao Tire announced bankruptcy because of broken cash flow.

In June 2015, Qingdao Doublestar and Deruibao Tire inked a “leasing” agreement and moved in Deruibao. From then on, Deruibao’s fixed assets and tire brands belonged to Doublestar.

At the end of 2015, Shandong Hengfeng Tire purchased equities in Shandong Wosen Tires.

In late January, 2016, Qingdao Doublestar signed a strategic cooperation agreement with Shandong Hengyu Technology to jointly invest in and set up a joint-venture.

Analysts reckon that since all the M&A cases might have been led by local government, their future would be uncertain.

More Producers May Announce Bankruptcy

In Contrast, Double Coin buying Xinjiang Kunlun Tire and Sailun Tyre’s purchase of Shandong Jinyu as well as Shenyang Heping Tire were considered as regular business conducts.

“Large enterprises tend to be attracted by those firms with strong manufacturing capacity and advanced equipment. Therefore, even if a firm wants to be purchased, it should become stronger and bigger,” said an industry insider.

Cooper Tire & Rubber might be caught by Qingdao Geruida Rubber’s strong background of investor and standardized production management.

An industry insider said the M&A in China’s tire industry will be irresistible with regard to both national policy as well as industrial development.

There are about 300 tire producers passed China Compulsory Certification and there are at least 500 tire companies in China.

With reference to other countries’ market structure with only a few tire manufacturers, an increasing number of tire producers will quit China’s market in the future.

Since most of them cannot survive through M&A, their only consequence would be bankruptcy.