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Tire Industry Monthly

Tariffs and China

David Shaw
Contributor: David Shaw
Posted: 07/06/2014

Over the last few weeks the United States has been debating whether to impose tariffs on car and light truck tires originating from China. A preliminary decision is due on 18 July which must be communicated by 25 July

I strongly suspect this trade sanction will be imposed, but equally, I don't think it will do much good either in the short term or the long term. Others have suggested that this is more about politics than real trade issues. I tend to believe them.

Last time the United States did this, the proportion of imports increased. And so did local prices to consumers.

In every market, including the United States, there is a market for cheap tires. There are traders and importers around the world who will meet that need, so imports to the US from Taiwan, Indonesia and elsewhere all increased as Chinese imports fell significantly.

A couple of smart Chinese companies shipped tires from the mainland to Thailand and from there to different parts of the world to disguise the true country of origin, but mostly, the Chinese companies found new export markets in the Middle East, Africa and in South America. Meanwhile the domestic companies and distributors took advantage of the reduced price competition to raise their prices sharply. There is every reason to believe that this new proposed 5-year period of sanctions will produce a broadly similar result.

As a group, and with a few notable exceptions, Chinese tire makers do not study their markets too closely and tend to ship container-loads of tires to whomever will buy them. Anecdotal evidence suggests that many Chinese tire makers are more than happy to ship US P-Metric sizes to Europe, the Middle East and elsewhere, in the hope that they will sell. This is one of the biggest differences between the tire makers in China and tire makers elsewhere in the world. No-one really knows how many tire makers there are in China. My company, Tire Industry Research has a list of over three hundred.

Total capacity is also much-debated. Our latest estimates suggest that total passenger car and light truck radial capacity in China is around 500 million units and output in 2014 will be a little over 400 million units. That's a factory utilisation rate of over 80%, which is a lot higher than some figures being used around the industry.

There is no question that tire makers in China are incentivised to export. Any material used in tires destined for overseas sales can be bought tax-free in China. Local towns and cities also have tax incentives for local factories who can export their goods – tires or anything else. Furthermore the industry has a business model which is essentially cost-plus. So many tire makers are competing and branding is so weak that selling prices of tires in China's domestic market are consistently driven by the lowest-cost producer.

As the price of raw materials fall, the selling price of tires in China falls. This applies to local tire makers as well as top international brands. If the price of NR increases once more, then we can expect a few factories to temporarily close until the price rises again to bring the necessary margin.

The Chinese companies extend this policy to their export markets. If you look at the selling price of Chinese tires in their export markets you can pretty much take the cost of materials; ad a mark-up and that's the selling price.

With NR prices and those of other raw materials at historic lows, the selling prices are also low compared to many parts of the world.

Around half of all tires made in China are exported. As the Chinese capacity increases – and it is rising at double-digit rates — the percentage of exports has steadily grown.

The domestic market for car and light truck tires in China is growing faster than the global average. But the economics of the Chinese model mean that exports from that country will continue to be cheaper than the manufacturing cost in all developed countries.

Because the US market is a large, integrated market, it is the export destination of choice for many Chinese tire makers. By coincidence, there are also striking similarities in the driving conditions in the two countries. Both feature long, straight roads with comparatively low speeds and few roundabouts. Consumer demand in both countries favours longevity over performance. Furthermore, unlike the EU market, there is a very limited Summer/Winter split and All-season tires are used in greater numbers in the US than some other countries. As a result, the US market is particularly vulnerable to exports from China. That's some of the background to this debate, but I just wonder one thing:

Labels

The EU has brought in mandatory tire labels. It looks like the debate over labels in the United States has ground to a halt as NHTSA finds it has other priorities and individual State legislatures – who will be responsible for enforcing any Federal laws —look at the EU experience of market surveillance and enforcement. Furthermore, the debate in the tire industry over the use of a wear /longevity parameter on the US label has revealed that it will be all but impossible to develop a reliable test for this. The existing UTQG System is known to be deeply flawed.

Currently, the China system is bringing in a voluntary labelling scheme which is similar to the EU scheme. But that is likely to be made mandatory.

Once China has a mandatory label scheme and the US does not, how can the US claim that its home-made tires are better than those originating in China which carry a mandatory label?

David Shaw
Contributor: David Shaw
Posted: 07/06/2014