Cooper secures another source for TBR tires

Cooper Tire & Rubber Co. has secured an alternative source of truck-bus radial tires, agreeing to purchase a 65 percent stake in China's Qingdao Ge Rui Da Rubber Co. Ltd. (GRT) for about $93 million.

The deal is pending customary regulatory approvals and is expected to close in the first half of 2016. Once complete, Cooper will rename the operation Cooper Qingdao Tire Co. Ltd. and source its Roadmaster radial truck and bus tires from its 1 million-sq.-ft. facility in Qingdao. The plant employs about 600 and has the capacity for 2.5 million to 3 million TBR tires annually.

Cooper did not disclose the facility's current capacity but said that it is producing several hundred thousand TBR tires now. The firm added that the facility could support an additional 2.5 million to 3 million passenger car tires annually under its current floor space if needed, with plenty of surrounding land to expand the facility should demand dictate.

The company already produces PSR tires in China at its Cooper (Kunshan) Tire Co. Ltd. subsidiary in Kunshan.

“This joint venture represents a great strategic fit within our existing and highly productive worldwide manufacturing network, allowing us to further optimize Cooper's global footprint and support growth in our regions,” said Roy Armes, Cooper's chairman, CEO and president.

The move gives Cooper an alternative source of TBR tires, at least until mid-2018. At that time, its off-take agreement with Prinx Chengshan (Shandong) Tire Co.—formerly Cooper's joint venture with Chengshan Group Co. Ltd.—will expire. However Armes said the firm could extend its agreement with PCT beyond its expiration date.

“We're going to honor our agreement with PCT, and we feel that we can do that while at the same time diverting some volume and business to GRT as we begin to ramp up,” Armes said. “PCT's done a very good job for us, and we don't have any complaints. This alternative source gives us the opportunity to mitigate any risks we may have there at this point in time. We don't see anything changing there.”

The executive stressed that while this move is not necessarily designed to replace the PCT volume, GRT has the capability of replacing it should Cooper opt to do so.

“We're not doing it just to replace everything at PCT,” Armes said. “What we are doing is giving ourselves an alternative source so we don't have all of our eggs in one basket. The size of GRT certainly would indicate that they could handle all of that volume from PCT. But there may be a rationale as to why we'd want to continue on with PCT when our agreement expires. I'm not sure what that would be at this time. They have been a very good supplier since we've sold our 65 percent. We don't have a reason to jump up and run away from them at this point in time.”

The right fit

In December 2014, Cooper Tire sold its 65 percent stake in its then-named CCT joint venture to Chengshan Tire for about $262 million. The now-named PCT venture was a key sticking point in its failed merger attempt with Apollo Tyres Ltd. because the JV didn't report financial information and refused to build any Cooper-branded tires.

The parties resolved their differences and eventually agreed to terminate the joint venture.

But in the aftermath, Cooper made finding an alternative source of TBR tires a high priority. Armes said Cooper found many companies were interested in doing business with it, but the firm used caution in selecting the right partner. He did not elaborate on other opportunities Cooper had, but he emphasized GRT stuck out as the best option.

“We had to be very, very good at our due diligence to make sure not only that the operation would satisfy our needs, but that we knew more about the partnership so that we minimized our risk there. It's not risk free, but we feel really good about this one,” Armes said.

The firm's search, while focused on China, did not exclude the possibility of sourcing TBR tires from another country. Chief Operating Officer Brad Hughes said Cooper used three priorities in selecting a joint venture partner:

c Finding a source of high quality, cost-competitive TBR tires for the North American market;

c Finding TBR capacity and distribution for China and Southeast Asian markets; and

c Diversifying the TBR sourcing footprint to include additional TBR capacity both inside and outside of China to serve global tire markets.

Hughes said Chi-na is projected to be the world's largest passenger car tire market by 2017 and already is the world's largest TBR tire market both in consumption and production of tires.

“China remains a critical element of our overall strategic plan for our global operation,” the executive added. “We are also interested in opportunities outside of Asia. We are beginning to develop our business in other markets in adjacent countries, building off of the infrastructure we have in China.”

Hughes said the initial focus is putting the plant in the position to supply U.S. branded Roadmaster products and eventually be a source of tires for China, Southeast Asia and other markets. Cooper said the Chinese tire market has been relatively flat over the last few years, but it is the largest TBR tire market in the world and strategically Hughes said it's important for Cooper to have a presence there.

While the facility has room to add passenger capacity if necessary, Armes said the primary focus is increasing output for TBR, adding that the firm won't be looking to add PSR capacity for quite some time.

“We're very happy with the starting point with regards to the capability that's already in place at GRT from a production and a technical standpoint,” Hughes said. “We'll need to introduce the tires we're planning to build for the U.S. market. We're quite confident we can get there fairly quickly from the base that they're starting from.”

A transparent partner

While many of Cooper's potential partners could have fit the firm's qualifications, Armes highlighted a number of factors that distanced GRT from the rest, starting with a strong group of experienced industry veterans with impressive technical capabilities.

GRT was established in 2014 after Qingdao Yiyuan Investment Co. Ltd. purchased the assets of the idle facility. Li Zhihua—founder, executive director and general manager of QYI—also is a professor at Qingdao University of Science and Technology, giving GRT strong ties to a major university with research and development capabilities that support the rubber industry.

Cooper also already had an association with some of the leaders of the joint venture through its dealings with Mesnac, which utilizes Qingdao University's expertise to develop new tire machinery technology.

Armes said Cooper will have direct access to some of this new technology through GRT's connection with the university.

But Armes said transparency was one of the biggest factors.

“They were easy to deal with and did everything they could to accommodate our needs,” Armes said. “Right out of the shoot it was a very good working relationship, which is what we were looking for. We were trying to avoid any kind of surprises, which is what we had at CCT.”When Cooper ended its relationship with CCT, it said options for securing a new source of TBR could come in a variety of forms, including an agreement with another supplier, a joint venture, an acquisition, adding capacity to its other facilities, buying a facility and running it, or building a new plant.

Armes said, in addition to leveraging an existing facility and developed staff, that the cost difference from buying into a partnership as opposed to spending $500 million to $1 billion on a new facility was a major factor.

“We have a proven track record in taking brownfield sites and making them successful,” he said. “Even though we sold off our 65 percent of CCT, that was a successful joint venture. We have our joint venture in Mexico that's been very successful.

“So as we look around, we've got a pretty good track record of developing these into something that can be successful longer term.”

Armes added that its CCT divestment gave Cooper one of the best paybacks in the company's history, and the firm is starting out with GRT at a much better point than it did with its CCT joint venture.

Global focus

The GRT partnership does not signal the end of Cooper's TBR supply diversification.

“We're still bullish on the market in China and Asia,” Armes said. “We may need to leverage more than just GRT to satisfy our demands. We've been growing in this category for the last few years, and we see potential growth going forward.”

Both executives see potential for future cooperation between Cooper and Argentina's Fate S.a.i.c. The firms recently agreed to a distribution partnership where Fate will utilize its network to distribute Cooper-branded products throughout South America.

Cooper does not currently manufacture tires in South America. Hughes said the firm's joint venture in Mexico serves the Latin American market through exports.

The company also recently established an office in Sao Paulo.

Armes said Fate was uncovered during Cooper's global evaluation process and that the companies may work together on a variety of potential cooperative ventures, including tire production, off-take arrangements, and possible cooperation on research and development activities, which potentially could further diversify Cooper's sourcing of TBR tires.

Among other products, Fate produces radial passenger, light truck, SUV, and truck and bus tires at its plant in San Fernando, Argentina, where it has capacity for about 5 million tires per year. With fiscal 2014 sales of $327 million, Fate was ranked 58th worldwide in Rubber & Plastics News' 2015 Global Tire Report.

Cooper said earlier that the Latin America region had potential to support 4 million to 5 million tires by 2020.

“Right now we get challenged a lot because the economy has been volatile,” Armes said. “But in the longer term, we believe that South America is a really good market for us. We're starting to prove that as our people build up the business down there.

“We're going to go through some economic ups and downs like most other parts of the world, but I think our timing is really good to get in and start taking advantage of that.”