Consumer Labels Have Unexpected Consequences
When consumer labels for tires became mandatory in Europe at the start of November 2012, few of us realised what impact they would have for upstream suppliers to tire makers.
We all know that Lanxess, Versalis, Styron, Solvay, PPG and other suppliers of synthetic rubber and silica have seen both sales and the level of technical research jump since around 2011.
Until recently, however, few of us thought that tire labelling would have much impact on suppliers of carbon black, steelcord, machinery makers and other less glamorous parts of the upstream value chain.
I don't want to paint all these as commodity products, because they are not. But they don't, at first glance, seem to make significant contributions to any of the three label parameters: rolling resistance, wet grip and noise. Most of that happens in the tread which is why suppliers of high-tech elastomers and compounding ingredients have seen a lot of business opportunities around labels.
I'm going to have to get into some statistics in the next few paragraphs, but bear with me, as this story has big implications for all upstream supply chains – especially those in China.
If a tire maker is seeking to get consistently high label scores on its tires, it has to be confident that a random test will show that the particular tire being tested will deliver the same or better performance than claimed on the label.
That's a given for premium tire makers. Some in the industry would argue that it is less true of certain import brands, but I disagree. There are a dozen or so brands in China and elsewhere who take their responsibilities in this area very seriously. Admittedly that leaves another hundred or more brands who are less concerned with their responsibilities. However, when I talk to those companies, they say making tires for the EU market is getting too difficult due to PAH restrictions; REACH legislation; labelling and a range of other barriers. In simple terms it is easier for them to make money selling tires to India, Africa or other parts of the world with less stringent legislation. So that's what they do.
I digress. This is not about Chinese imports. It's about tire manufacture.
Making a tire is complex. You make about 8 different compounds, each of which uses 20 or so different ingredients. You put steelcord or polyester and compound through a calender; you cut, slice, mix, extrude, and finally bring all the pieces to a building machine where they are assembled into an uncured tire and then you cook them for a while; do a bit of post-cure inflation and hope that the resulting products all perform the same as each other.
That's a lot of processes and a lot of materials. Each process adds a small amount of variability to the finished product. Each raw material adds a bit more variability.
So the final properties of a batch of 1000 tires will vary from one to another. If you tested all of them for rolling resistance, you might find one has an A-grade while another has a C-grade. Most of them might fall into the B category.
There's a standard curve – the Normal Distribution curve – which expresses this variability in a mathematical way. A single parameter of the normal distribution curve – the Standard Deviation -- measures process repeatability. A low figure for the Standard Deviation means that the process is tightly controlled and there's not much variability from the best product to the worst. A high figure for the Standard Deviation means the opposite.
But the legal authorities do not care about the statistics. If they test a tire and it performs worse than claimed, then they are likely to prosecute the offender.
To be safe, any responsible tire maker will classify all those tires as C-grade. Or even E-grade if the very worst performing tires from a production line fall outside the rigid limits which define the C band.
If I were a tire maker, I'd be trying to cut down that variability so that all the tires fall within a single band. If I could do that, then I wouldn't have to down-grade a whole product line simply because a few outliers fall below a particular label thresh-hold.
And this is why the label is having such an impact on all the upstream suppliers. They are being asked to tighten up the variability associated with their own manufacturing processes.
Tire building machines (TBM) are at the heart of this and I hear that the specifications for TBMs are rocketing up when it comes to process variability.
There's a phrase developed in the data processing business which applies to factory quality control: Garbage in means garbage out.
Translated to tire manufacture; that says if the incoming materials vary in their technical characteristics, then there is little hope of delivering tires with a reliably consistent technical performance.
So in the quest to raise their label grade scores, tire makers are insisting that their suppliers deliver more consistent materials and develop equipment with more consistent process cycles.
This does not improve overall tire safety or fuel economy – it means fewer over-performing tires as well as fewer under-performing tires. It does mean that tire makers can start to think about upgrading the label ratings on whole families of tires.
They'll have to rely on their suppliers to support them in this.
If I were a stock analyst, I'd be issuing 'buy' notices on companies which sell state-of-the-art measuring and test equipment to the upstream suppliers of elastomers, steelcord, carbon black and other ingredients; because the demand for high-tech testing equipment looks set to rocket at suppliers and also among tire makers.