Confidence in China's tire market remains unshaken by recent global developments

Despite a number of negative developments over the past year—including the imposition of tariffs on exports to the U.S. and the steep hike in costs threatened by the Beijing government's introduction of a new standard for compound rubber—confidence in the Chinese tire market remains unshaken.

However, the squeeze on exports to the U.S. and other countries, combined with loss of competitiveness, particularly at the lower end of the market, could lead to bankruptcies, observers contend.

Smaller, less modernized players are said to be most in the firing line—though the fate of Shandong Deruibo suggests that larger companies are not immune from the impact of increasing overcapacity in the Chinese tire industry.

Delegates to the 2015 China Rubber Conference in Guangzhou, China, earlier this year were told that the U.S. anti-dumping tariffs—estimated to affect $3.3 billion worth of products—and an anti-dumping investigation on Chinese tires by the Customs Union of Belarus, Kazakhstan and Russia are casting a long shadow on China's tire-making sector.

China's export of passenger car and light truck tires to the U.S. accounts for up to a third of such tires' world total export volume, or 15 percent of the global output, according to Shen Jinrong, chairman and general manager of Zhongce Rubber Group, China's largest tire maker.

The country's tire makers' operating rate is plummeting. In February the China Rubber Industry Association (CRIA) tire subcommittee's member companies reported a 5-percent year-on-year drop in radial tire output.

In 2014, China's total tire output rose 6.2 percent to 562 million units, but CRIA's tire maker members suffered a 1.7-percent drop in sales and a 4.4-percent drop in profit. Export volume rose 22.6 percent, but the value of those exports increased a mere 3.5-percent.

CRIA also pointed out that while domestic tire makers had a 9.7-percent profit drop last year, foreign-owned companies in China delivered 16.7-percent profit growth.

Research by China Automotive Technology Research Center and Lanxess shows there are 40 foreign-owned above-scale tire companies and more than 500 domestic ones in China, each group accounting for half of the market share. The mid- to high-end segment, however, is almost completely taken up by foreign makers.

The Chinese tire industry exports 40 percent of its total tire output, but 30 percent of the output does not meet the requirement of the European Union (EU) phase I standards and 50 percent the phase II standards.

The research also states a turning point in the shuffling of China's tire sector occurred in 2013, with a 1.3-percent rise in concentration ratio to 30 percent, and accelerated consolidation of smaller players is on the horizon.

This year, China's tire output is expected to reach 587 million units, up 4.5 percent from 2014. LMC International, a United Kingdom-based consultancy, projects that more than half of the world's tire capacity growth planned by 2018 will be built in China.

Several Chinese tire makers are also setting up plants overseas for reasons including trade conflicts such as the U.S. tariffs—a move that's said to impact more than 1 million jobs in China.

Sailun Group is building a 7.8 million unit-per-year factory in Vietnam, while Shandong Linglong and Zhongce Rubber Group have opened plants in Thailand. GITI Tire Group, the Singapore-based company with extensive holdings in China, is building a plant in the U.S.

Worldwide demand for replacement tires, accounting for 75 percent of global tire sales, has been rising steadily, according to LMC.

About 1.1 billion replacement light vehicle (passenger/light truck) tires and 150 million medium/heavy-duty commercial vehicle replacement tires were sold globally last year, LMC said. Light vehicle replacement tire sales in China, at 140 million units in 2014, will begin accelerating and reach 270 million in 2020 due to rapid car ownership growth.

During China's annual National People's Congress meetings in March, industry representatives urged the government to raise tire export rebates and increase tariffs and set quota on imports of agricultural products, machinery and aircraft from the U.S.

With the battle in full swing, some Chinese manufacturers have aired concerns that revoking such tariffs may actually do harm to China's tire industry, as it could bring on more chaotic competition and lead to a price war.

To regulate its tire market better, China has been improving its tire labeling rules, adopting indexes equivalent to that of the EU standards. A set of new or revised standards on rolling noise, wet grip performance and testing methods is expected to come out this year.

New tire proving grounds are also under construction, including the Central Asia Tire Proving Ground in Shandong.

Despite these seemingly unhelpful developments, the outlook for the Chinese tire market is far from gloomy, according to feedback from a range of Western players with their finger on the pulse of the Chinese tire market.

Machinery, equipment and technology suppliers contacted for this article noted that the market is reviving and orders for top-shelf equipment are rising, especially among the export-oriented manufacturers.

All major Chinese players in the market are studying automation in order to increase their productivity.