Mullineaux, Neil-Light Vehicle Tyres-iSmithers Rapra Publishing (2010-02-09).pdf

8/10/2019 Mullineaux, Neil-Light Vehicle Tyres-iSmithers Rapra Publishing (2010-02-09).pdf

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Market Reportby

Neil Mullineux

Light

VehicleTyres


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Light Vehicle Tyres

A Rapra Market Report

by

Neil Mullineux

September 2004

Rapra Technology LimitedShawbury, Shrewsbury, Shropshire, SY4 4NR, UK

Tel: +44 (0)1939 250383 Fax: +44 (0)1939 251118 http://www.rapra.net


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The right of Neil Mullineux to be identified as the author of this work has been asserted by him inaccordance with Sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

2004, Rapra Technology Limited

ISBN: 1-85957-484-X

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any meanselectronic, mechanical, photocopying, recording orotherwisewithout the prior permission of the publisher, Rapra Technology Limited, Shawbury,Shrewsbury, Shropshire, SY4 4NR, UK.

Typeset, printed and bound by Rapra Technology Limited.


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Contents

1 Introduction ..................................................................................................................................... 11.1 Background..............................................................................................................................................11.2 The Report...............................................................................................................................................11.3 Methodology............................................................................................................................................11.4 About the Author.....................................................................................................................................2

2 Executive Summary ...................................................................................................................... 32.1 Industry Economics ........................................................... ........................................................ ..............32.2 Manufacturing ............................................................... .............................................................. ............4

2.2.1 Materials...........................................................................................................................................42.2.2 Current Manufacturing.....................................................................................................................42.2.3 New Manufacturing Methods...........................................................................................................4

2.3 Marketing ....................................................... ................................................................... ...................... 42.3.1 Brands ........................................................... ........................................................ ........................... 42.3.2 Distribution ................................................................ ..................................................................... .52.3.3 Market Niches .............................................................. ................................................................... .5

2.4 Technical Developments ........................................................... .............................................................. 52.4.1 Legislative Environment ......................................................... ........................................................ .52.4.2 Research and Development ........................................................ ...................................................... 6

2.5 Recycling.................................................................................................................................................62.6 North American Market...........................................................................................................................62.7 European Market ...................................................... ......................................................... ...................... 7

2.7.1 West and Central Europe..................................................................................................................72.7.2 Russia............................................................... ........................................................... ..................... 9

2.8 Asian Market ............................................................... ................................................................ ............92.8.1 Japan.................................................................................................................................................92.8.2 South Korea....................................................................................................................................102.8.3 India ........................................................ ............................................................ ........................... 102.8.4 China .............................................................. ............................................................. ................... 11

3 Industry Economics ........................................................................................................................ 133.1 Introduction ........................................................... ............................................................ .................... 133.2 World Market ....................................................... ............................................................. .................... 133.3 Industry Structure ....................................................... ................................................................. ..........133.4 Markets by Product Sector.....................................................................................................................153.5 Sector Markets.......................................................................................................................................15

3.5.1 Original Equipment (OE) Market...................................................................................................163.5.2 Replacement Market ....................................................... ......................................................... ......17

3.6 Market Characteristics...........................................................................................................................183.6.1 Market Maturity ............................................................ ................................................................. 193.6.2 Tyres as a Commodity....................................................................................................................20

3.7 Cost Structure .......................................................... .................................................................... ..........213.8 Productivity Increases............................................................................................................................223.9 Capacity Changes ...................................................... .................................................................. ..........233.10 Production Relocation .......................................................... ............................................................... 243.11 Consolidation.......................................................................................................................................26

4 Manufacturing ............................................................................................................................... 314.1 Introduction ........................................................... ............................................................ .................... 314.2 Materials................................................................................................................................................31

4.2.1 Rubber............................................................................................................................................324.2.2 Carbon Black..................................................................................................................................344.2.3 Silica...............................................................................................................................................354.2.4 Steel Cord.......................................................................................................................................364.2.5 Fibres..............................................................................................................................................374.3 Current Manufacturing......................................................................................................................38

4.4 New Manufacturing Methods................................................................................................................404.4.1 Michelin ........................................................... ..................................................................... .........414.4.2 Goodyear........................................................................................................................................42


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4.4.3 Bridgestone ............................................................... ...................................................... ............... 424.4.4 Continental............................. ................................................................ ........................................ 434.4.5 Pirelli......................................... ................................................................ ..................................... 444.4.6 Other Developments ............................................................. ....................................................... .. 44

4.5 The Future for Manufacturing..... ................................................................ .......................................... 45

5 Marketing.......................................................................................................................................47

5.1 Introduction...................................................... ............................................................. ........................ 475.2 Distribution ...................................................... ....................................................................... .............. 47

5.2.1 Wholesaling ......................................................... ........................................................... ............... 475.2.2 Retailing........................ ................................................................ ................................................. 485.2.3 E-Commerce ............................................................ ....................................................... ............... 49

5.3 Branding............... ................................................................ .............................................................. ... 505.5 Market Niches ............................................................. ...................................................................... .... 53

5.5.1 High Performance Tyres ............................................................ .................................................. .. 535.5.2 SUV Tyres ....................................................... ................................................................ .............. 555.5.3 Winter Tyres ......................................................... .......................................................... ............... 555.5.4 Tuner Market .......................................................... ........................................................ ............... 57

6 Technical Developments ................................................................................................................. 59

6.1 Introduction...................................................... ............................................................. ........................ 596.2 Legislative Environment ........................................................ ........................................................... .... 606.2.1 Environmental Protection ...................................................... ...................................................... .. 606.2.2 Consumer Safety.............................................................. ........................................................... ... 616.2.3 Health and Safety........................................................... ................................................................ 616.2.4 Impact of Legislation ........................................................ ......................................................... .... 62

6.3 Research and Development........................................................... ........................................................ 636.3.1 Research and Development.................................................... ........................................................ 636.3.2 Materials Development........ ................................................................ .......................................... 636.3.3 Tyre Property Improvements ............................................................. ............................................ 64

6.4 Runflat Tyres........................................ ................................................................ ................................. 676.5 Pressure Sensing...................................................... ................................................................ .............. 686.6 Future Development......... ................................................................ ..................................................... 69

7 Recycling ........................................................................................................................................737.1 Introduction...................................................... ............................................................. ........................ 737.2 Hierarchy of Waste................................................................................ ................................................ 73

7.2.1 Reduction............................................................. ........................................................... ............... 747.2.2 Re-use ......................................................... .......................................................... ......................... 747.2.3 Recycling ......................................................... ............................................................... ............... 757.2.4 Recovery...................................................... ........................................................... ....................... 767.2.5 Landfill ............................................................. .............................................................. ............... 77

7.3 Regional Solutions ........................................................... ................................................................ ..... 777.3.1 North America .......................................................... ................................................................. .... 777.3.2 Europe...................... ................................................................ ................................................. ..... 787.3.3 Asia.......................................................... ............................................................. ......................... 797.3.4 Developing Countries ........................................................... ...................................................... ... 79

8 North American Market ................................................................................................................. 818.1 Introduction...................................................... ............................................................. ........................ 818.2 Market .............................................................. ............................................................. ........................ 828.3 Supply Structure... ................................................................ ............................................................. .... 848.4 Retailing ............................................................... .............................................................................. ... 86

9 European Market ...........................................................................................................................899.1 Introduction...................................................... ............................................................. ........................ 899.2 Market .............................................................. ............................................................. ........................ 909.3 Supply Structure... ................................................................ ............................................................. .... 929.4 Retailing ............................................................... .............................................................................. ... 959.5 Russia............................................................... ............................................................. ........................ 97

9.5.1 Market.......................... ................................................................ .................................................. 97

9.5.2 Supply Structure ....................................................... .................................................................. ... 9810 Asian Market ..............................................................................................................................103


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10.1 Overview ................................................................. ....................................................... ................... 10310.2 Japan..................................................................................................................................................104

10.2.1 Introduction................................................................................................................................10410.2.2 Market .............................................................. ...................................................... .................... 10410.2.3 Supply Structure.........................................................................................................................10510.2.4 Retailing ............................................................... .............................................................. ........106

10.3 South Korea.......................................................................................................................................10810.4 India...................................................................................................................................................10910.4.1 Introduction................................................................................................................................10910.4.2 Market ............................................................... ..................................................... .................... 11010.4.3 Supply Structure.........................................................................................................................11210.4.4 Retailing ............................................................ ........................................................... .............. 114

10.5 China ......................................................... ............................................................ ............................ 11410.5.1 Introduction................................................................................................................................11410.5.2 Market ............................................................... ...................................................... ................... 11510.5.3 Supply Structure.........................................................................................................................11610.5.4 Retailing ...................................................... .................................................................. ............. 119

Abbreviations and Acronyms .................................................................... ............................................ ....121


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1 Introduction

1.1 Background

The tyre industry is the largest part of the rubber manufacturing industry; indeed it is so large that itis usually classed as an industry in its own right. It dwarfs any other part of the rubber industry and

absorbs well over two-thirds of all natural rubber production and almost as large a proportion ofsynthetic rubber manufacture. Consequently much of the innovation in the wider rubber industry,both in terms of materials and in terms of manufacturing, emanates from the tyre industry.

Rapra Technology is Europes leading independent plastics and rubber specialist, with over 80years experience of providing technology, information and consultancy on all aspects of plastics,rubbers and polymer-based composites. An important aspect of this activity is publishing technicaland market information on these materials.

A comprehensive analysis of the economics of the tyre industry was seen as a key component ofthe publishing catalogue, both as an important title in its own right and as an essential backgroundto many of the other reports.

Light vehicle tyres and heavy truck and machinery tyres are both part of the tyre market, butbecause they differ dramatically in their composition, manufacture and marketing it was decided toseparate the two and restrict this volume to light vehicle tyres, particularly passenger car tyres.

1.2 The Report

This report is designed as a systematic analysis of the passenger car tyre industry. It starts with abroad view of the industry, examining first the major markets for tyres and the manufacturers oftyres. It then goes on to identify the chief characteristics of the industry and the major economicand commercial pressures impinging upon it. This introduces and brings together themes that willreappear throughout the rest of the report.

It then examines critical aspects of the world industry manufacturing, marketing, technicaldevelopments and recycling; describing the changes that are taking place and explaining why theyare happening.

The three major markets for tyres North America, Europe and Asia, which together account foralmost 90% of world demand, are analysed in the next three chapters. There are common themes toall three markets, but they have major differences and these are brought out and contrasted.

Profiles of the largest manufacturers Bridgestone, Goodyear and Michelin are juxtaposed in asingle chapter to facilitate comparison between these three dominant companies. Between themthey command almost 60% of the world market, but six mid-size companies also play key roles in

certain regional markets, and these are also profiled.

Finally, the report looks at the future for the industry, drawing together the various themes thathave been identified and projecting a future scenario for the industry.

1.3 Methodology

The report uses as a foundation extensive desk research based primarily on technical literature andindustry journals published in North America, Europe and Asia. This includes information from theRapra Polymer Library (www.polymerlibrary.com). In particular it makes use of two sources ofquantitative data The Michelin Fact Book 2003 and the World Tire Report 2003 published byCrain Communications as a supplement to their rubber industry publications. All quantitative data

is attributed to its source.


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This factual basis for the report has been augmented and filled out with a programme of interviewswith senior management in all the major companies and with other companies and organisationsthat deal with the industry suppliers, service companies, trade associations, etc.

Although the report is largely based on a factual data, opinions are expressed throughout the report,particularly when projecting future trends. These opinions are solely the responsibility of the

author.

1.4 About the Author

Neil Mullineux is a partner in Bowfell Associates, an independent consultancy specialising inmarket research and strategy for the automotive industry. He has worked in Europe, North Americaand East Asia for both vehicle and components manufacturers and has undertaken several projectsfor intergovernmental agencies.

He is a Visiting Research Fellow in the Centre for Automotive Industry Management atNottingham Business School. He has written a series of reports on aspects of the internationalautomotive industry for Financial Times Business and the Economist Intelligence Unit.


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2 Executive Summary

The tyre industry is the largest part of the rubber manufacturing industry; indeed it is so large that itis usually classed as an industry in its own right. Consequently much of the innovation in the widerrubber industry, both in terms of materials and in terms of manufacturing, emanates from the tyreindustry.

This report is designed as a systematic analysis of the passenger car tyre industry.

2.1 Industry Economics

Three large companies Bridgestone, Goodyear and Michelin now dominate the world tyremarket with a share of about 56%. There then follow four mid-sized companies, which have about18% of the world market Continental, Sumitomo, Pirelli and Yokohama with a combined shareof 17.6%. In total eleven companies account for 81.6% of the world market.

Even though the largest companies have a turnover well in excess of $10bn, they remain largelyspecialist tyre manufacturers. Many of the smaller companies also concentrate almost exclusivelyon tyres. However, the medium-sized companies are diversifying away from tyre manufacturing.

Passenger car tyres are the most well-known product of the tyre industry but they are by no meansthe only product. World production of tyres ranges from lightweight and relatively unsophisticatedbicycle tyres to very large and very expensive tyres for giant machinery such as earthmovers orjumbo jets.

Unusually, if not uniquely, in the automotive components industry, the tyre manufacturers only sella minority of their output to OEMs. The key factor that distinguishes the tyre market from anyother automotive component is the size of the replacement market or aftermarket three-quartersof road tyres are sold as replacement tyres and only one-quarter as original equipment.

The big three tyre manufacturers dominate the OE market, but other large regional players alsohave a share, particularly in Europe. Worldwide, the replacement tyre market for light vehiclesrepresents about 714m tyres. The replacement tyre market is certainly more profitable for the tyremanufacturers but it has distinct problems. The general problems of slow growth and marketmaturity are exacerbated by cyclical growth in supply to OEMs. Despite the poor profitability ofsales to OE customers and even though the replacement market represents over 70% of thepassenger car tyre industrys sales, tyre makers profitability is also cyclical. The replacementmarket is a relatively profitable sector of the overall tyre market, but it cannot compensate for thevagaries of the OE market.

A traditional indication of market maturity is continual pricing pressure in the market. Although theworld tyre market appears to be an oligopoly, there are enough small competitors to keep continual

pressure on prices. In broad terms a tyre which cost $69.90 in 1979 sold for $41.02 in 2003.

The major companies within the tyre industry are all constrained by the laws of economics andsubject to similar commercial pressures. In very broad terms the cost of tyre manufacture breaksinto three parts: raw materials; labour; and fixed costs. The tyre industry has high fixed costs,making it extremely difficult to improve returns unless costs are cut or market share gained. Rawmaterials typically represent 25% of the selling price of a car tyre. Labour costs represent about30% of sales and this has led to a move for manufacture in lower labour cost countries. This hasbeen helped by relatively low transportation costs for the inter-regional movement of tyres about$1-2 for a passenger tyre. In the last decade all manufacturers have tried to increase productivity inexisting operations in order to become low-cost producers. The continuing drive for improvedproductivity has resulted in excess capacity in many areas and product sectors.


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The overall outlook for the tyre industry is dependent upon supply much more than demand. Thereis a close relationship between aggregate supply and profitability for individual tyre companies.

As a result there have been gradual moves towards consolidation. Before 1985 a dozen largecompanies dominated the world tyre market, but after a rapid series of mergers and acquisitions,seven companies emerged with three-quarters of the market.

2.2 Manufacturing

2.2.1 Materials

Production of synthetic rubber achieved parity with natural rubber in 1967 and since then moresynthetic rubber has been used in tyre production than natural rubber. Carbon black has been usedas the filler of choice for tyres since the 1920s, although it is now receiving competition fromsilica. Silica-filled rubber reduces the rolling resistance of tyres markedly but initially it had adetrimental effect on other tyre properties such as traction and durability. Steel cord is used in allradial tyres, both for passenger cars and for trucks, as a reinforcement, and to form the bead whichsecures the tyre to the wheel. In addition a wide variety of fibres are used in tyres as reinforcement.

2.2.2 Current Manufacturing

Tyre manufacturing is part of the chemical industry but unlike most processes in the chemicalindustry, tyre manufacture is a discontinuous process. A tyre is a composite product of materialsthat have widely differing properties. The three main materials used in a tyre polymers, fabric andsteel reinforcement follow separate routes in the preparatory stages of tyre manufacture. Thepolymers, various mixes of natural and synthetic rubbers, are mixed with fillers carbon black orsilica and other chemicals to make the rubber component of the tyre. The various subassembliesare then brought together for the building process. The individual components are pressed intoshape sequentially by automatic rollers, giving a green tyre. This is placed in a curing press and the

curing process changes the rubber permanently by vulcanising it, converting the green tyre to afinished product.

2.2.3 New Manufacturing Methods

Large-scale plants making enormous quantities of a very few types of tyre are very efficient for themost popular tyres, but the market has been fragmenting, with both tyre sizes and typesproliferating. All manufacturers have been looking at ways to reduce the inefficiencies in theirproduction process and at the same time looking to serve the market demand more effectively. Thekey to any improvement in manufacturing is to make it more of a continuous process and to reducethe number of break points which destroy this continuity, eliminating as many of the stepsinvolving semi-finished components as possible.

The new methods introduced by the major companies are examined in detail. The newdevelopments have come mainly from the dominant firms in the industry. It would appear thatproduction advantages are beginning to swing back to the large established companies and awayfrom the aggressive newcomers.

2.3 Marketing

2.3.1 Brands

About 30% of passenger car tyres are sold to original equipment manufacturers, and these buyersare extremely sophisticated. The tyre brand means little to them (though it does have someinfluence in their choice of tyres, particularly for prestige or high performance vehicles). The other


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70% of passenger car tyres are an aftermarket product and it is here that the tyre companies areattempting to get rid of their commodity reputation by developing brands.

In order to clarify their brand structure most manufacturers have concentrated their efforts on threemain brands, but because they have only recently become true multinationals they have hadconsiderable difficulty even achieving this simple brand structure. They have chosen a good,

better, best formula.

2.3.2 Distribution

In most of the developed markets distribution is a two-tier operation with both wholesalers andretailers servicing the market but the balance and function varies between regions. Retailing iscarried out by a wide range of businesses ranging from petrol service stations to large chains ofspecialist tyre fitters. In most developed economies independent tyre fitters operating a two or threebay centre comprise the majority of outlets and the non-specialist outlets are in decline. TheInternet is gaining in importance as more than 60 percent of tyre buyers access the Internet, butonly 16 percent of them use it when they need to buy tyres.

2.3.3 Market Niches

Every manufacturer seeks out market niches areas of the market where it can establish a specialposition. Three segments of the passenger car tyre market are particularly buoyant at present,showing rates of growth which far outstrip the market average. Consequently most manufacturersare concentrating a lot of their activity on these three sectors ultra-high performance tyres, SUVtyres and winter tyres. High performance and ultra-high performance tyres used to be limited to avery small segment of the market, but as cars have improved in performance and specificationthese tyres are now commanding an ever larger share of the market. In Europe especially, but alsoin North America, there has been a surge in demand for high performance tyres V-, W- and Z-rated tyres. Of the 63.6 million replacement tyres shipped to the performance sector, the ultra-high-

performance tier accounted for about 34.7 percent. In Europe high performance tyres will increasefrom a market share of 18% in 2000 to a forecast share of 31% in 2005. The market for SUV tyreshas grown as rapidly as the market for sports utility vehicles and, until recently, has shown littlesign of slowing down.

The market for winter tyres has built up gradually but it is an erratic market and very seasonal. 80%of sales are made in the second half of the year and demand can be very fickle, depending on thedate of the first snowfall. The market is likely to grow at a faster rate than the general tyre marketbut the growth is unlikely to be consistent. However, over time growth is significant. In 1995winter tyres accounted for 0.5% of the Dutch market but by 2002 this had risen to 7%.

2.4 Technical DevelopmentsPassenger car tyres provide by far the largest market for tyre manufacturers but at the same timethey demand a high level of research and development. The OE market in particular demands a lotfrom the tyre industry as the vehicle designers set very specific requirements for the tyremanufacturers to reach. Developments tend to be incremental but, in total, tyre technology hasmade enormous progress in recent years. A typical tyre has become lighter and longer lasting withless rolling resistance.

2.4.1 Legislative Environment

The tyre industry has always worked within a framework of legislation but, until recently, the

legislation has been essentially national. There is an increased focus on requiring enhancedenvironmental protection in all areas relating to tyres tyre production, tyre usage and tyre


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disposal. The most recent environmental measure of specific application to tyres is the EUDirective on tyre noise, which sets limits on the noise that tyres may make when in contact with theroad. An even more immediate challenge has been established by the End-of-Life Vehicles (ELV)Directive.

Until recently tyre safety has been of little concern to legislators. However, this situation has now

changed as the TREAD Act in the US is a much more intrusive measure.

The normal health and safety regulations affect the tyre industry but this is a burden shared equallyby all companies. However, there is a growing disparity between the developed regions wherelegislation demands roughly equal standards between countries in Europe and North America andthe countries of the developing world where standards are much lower or non-existent.

2.4.2 Research and Development

The tyre industry spends over $2.5bn on research and development each year. Both tyre quality androads have improved dramatically over the past century but there is still pressure to improve the lifeof tyres. This is being carried out both by improvements in materials and by design modifications.Reducing tyre weight is particularly important as it reduces the unsprung weight of the vehicle.Tyre/road noise is one of the major environmental problems of modern society and is not yet undercontrol. The rolling resistance of tyres was not given much attention until recently; far moreattention was paid to grip and braking capability. However, the increased emphasis on economyand environmentally friendly equipment has now given it much more importance. Developments inother tyre characteristics such as wet grip, high performance and winter tyres are also examined.The innovative PAX tyre developed by Michelin is analysed and its prospects discussed.

New developments, particularly run-flat tyres and the alternative methods of pressure sensing, arediscussed and new technologies which will affect tyre design in the future are examined,culminating in the objective of the intelligent tyre. Almost every tyre company is keen toemphasise its ability to develop integrated systems which can optimise braking and steeringperformance in cars and the different approaches are discussed.

2.5 Recycling

The disposal of scrap tyres is a problem that has been growing for decades as volumes increase andbecause a vulcanised rubber tyre is a difficult recycling challenge. In environmental terms there arefive broad alternatives for disposal demonstrating the relative desirability of each approach. Indescending order of preferment the hierarchy alternatives are:

Reduction reducing the number of tyres that need to be scrapped.

Re-use either retreading to make a new tyre or using scrap tyres for other purposes.

Recycling treating the materials in a tyre so that they can be used in other products. Recovery essentially burning in order to recover energy.

Disposal landfill

The progress in each of these areas is examined. The chapter then goes on to examine the approachbeing taken in the main world regions, North America, Europe and Japan and Korea. Somedisposal schemes are taking place in developing countries but these are isolated schemes ratherthan comprehensive disposal plans.

2.6 North American Market

The three countries, Canada, Mexico and the USA, account for almost one-third of the world

demand for OE tyres and well over one-third of the demand for replacement tyres. Of the threemain regions for the world tyre industry North America is the largest, but the other two are


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catching up quickly. Because of the relative poverty in Mexico that country only accounts for about5% of the tyre market, compared with 10% in Canada and 85% in the USA. Not only is NorthAmerica the largest world market, it was also the earliest one to develop. However, although thisled to early dominance in world markets the US companies were unwilling to learn from others.Consequently they were slow to innovate and this left them vulnerable to takeover.

However, it is essential for any large tyre manufacturer to have a presence in North America. Oncea company has a credible presence in this market, it is no longer a French supplier or a Japanesesupplier, but a global one.

The two trends in the North American tyre market are linked with the move towards more powerfulvehicles. Tyres for the mass market still predominate, but there is a steady growth in tyres forSUVs and also in high performance and ultra-high performance tyres.

A total of 65 plants supply the North American market, the majority being in the USA. The bigthree companies Bridgestone, Goodyear and Michelin dominate North American productionwith 40 of the 65 plants, 62% of the total in terms of numbers, but about 70% in terms of capacity.There is a move offshore for the more standard tyres, concentrating North American production on

higher quality tyres with more value added. Total capacity is roughly in line with market demandbut the North American market, like other regional markets, is not self-sufficient. About a quarterof the demand is satisfied by imports, partly from companies in Korea, India and China but mainlyby the big international companies bringing in tyres from their plants elsewhere in the world.

Goodyear is the leader in the US/Canadian OE light vehicle tyre market, but Firestone takes thatposition in Mexico. Goodyear is also the market leader in the region for replacement tyres butMichelin is also strong in this area.

There are three broad groups of brands in the North American market flag brands, associatebrands and private brands and the major manufacturers are associated with all three. For a longtime private brands were gaining market share, but since 1991 the majors have fought back with

their flag brands for brand conscious motorists and associate brands for the price conscious.

The distribution of tyres has been undergoing a fundamental change, with the emphasis movingaway from independent tyre specialists and towards chains and mass merchandisers. For marketingpurposes the market can be divided into four distinct segments:

Brand conscious about 26%, increasingly slightly.

Value customer about 27% and rising. Customers who would prefer an associate brand.

Store reliant 24% and stable. Would rely on store recommendation.

Price conscious about 22%, declining. Looking for the cheapest suitable product.

This change in consumer preferences has led to a dramatic shift in the channels of distribution.

There has been a rise in the importance of tyre discount chains and of warehouse clubs, and anupheaval in the position of mass merchandisers. The small independents appear to be a dyingbreed, even though single outlets still account for 25% of tyre sales. Manufacturer outlets compriseabout 8% of the total market, and this proportion has declined steadily for some years.

2.7 European Market

2.7.1 West and Central Europe

Europe is second only to North America in importance for the tyre industry, but it is a verydifferent market. The countries bordering western Europe are now members of the EU and arerapidly being integrated into the economy of the west. The US companies, Goodyear and Firestone,

were the first to consider western Europe as a single entity rather than individual countries. Thecompanies acquired in eastern Europe have now been integrated into the wider European


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production network of each company and form part of their overall strategy for the region,particularly with the accession of ten new countries into the EU in May 2004. The strategy for allthe multinationals has been to establish a manufacturing presence in central Europe for threepurposes:

To provide a low cost supply point for western markets;

To establish a presence in developing countries that are likely to grow rapidly; To act as a bridgehead for penetration into eastern Europe and Russia.

Europe is, in total, a very large market and also probably the most sophisticated and demandingmarket in the world though it is mature and only growing slowly. The overall market is forecast toexpand at an average annual rate of 3.3% until 2008, somewhat faster than North America butmuch slower than in the high growth areas of Asia. The key to the market is that Europe is thehome to more car manufacturers than anywhere else. The OEMs provide a market in their ownright, but they also set new demands on the tyre industry with every new model that is launchedand this in turn leads to more sophisticated and more knowledgeable tyre buyers in the replacementmarket. As in North America, about half of the market buy mass market tyres but a very high 41%of drivers use high performance tyres compared with 17% in North America. Tyre sizes of 16'' and17'' are now much more common and low profile tyres are helped by this trend. Although thewinters are no worse than in many parts of America, winter tyres account for almost a quarter ofthe market. The market is mainly concentrated in central and northern Europe Scandinavia,Germany, Austria and Switzerland, but it is beginning to make progress in eastern Europe as well.The rest of Europe use summer tyres all year round; there is only a very small market for all-seasontyres.

Instead of a national management structure in each country, the tyre manufacturers now use allfactories in the region as a production resource. In recent years overcapacity has been very apparentbut the major players have carried out a programme of plant closures. However, Europe has over90 plants serving a market similar in size to North America, where there are only 60 plants.

The replacement tyre market is mature and relatively stable because of the long-term contracts inplace with equity chains and independent dealers. Now that Goodyear has taken managementcontrol of Sumitomos Dunlop operations in the region, five multinationals dominate the market inEurope Michelin, Goodyear, Continental, Bridgestone and Pirelli. Between them they command83% of the market. Michelin is the market leader in Europe, but in the course of the 1990s it lost alittle of its market share because of its lack of a low price brand. Continental has traditionally beenthe second largest tyre supplier to the European market, but Goodyear fought tenaciously for thatposition and eventually achieved it when it took control of Sumitomos Dunlop subsidiary. Theindependent importers bring in tyres from manufacturers elsewhere in the world, particularly fromthe Far East. These companies made dramatic market share gains when they first entered themarket, as the tyres were sold at significant price discounts to existing brands. This progress swiftlyslowed as the multinationals reacted by bringing in their own branded tyres from low costcountries.

In most European countries the manufacturers sell to wholesalers who, in turn, distribute to retailoutlets. The majority of retail outlets in Europe are specialist tyre fitting centres or tyre and exhaustcentres; only a minority of replacement tyres are sold by independent garages, and an even smallerproportion by franchised garages. Across the EU, 50% of replacement passenger car/light trucktyres are sold through tyre specialists (independents, tyre manufacturers controlled chains etc.),10% through car dealers, 20-30% through fast fit centres and the remainder through a variety ofoutlets. Independent tyre dealers dominate the aftermarket in Germany, Italy, Scandinavia andSpain whereas in the UK, Belgium and the Netherlands chains of tyre centres predominate. Thereal growth in the European tyre market is found with independent groups, usually led by anentrepreneur.


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2.7.2 Russia

The break-up of the Soviet Union appeared to promise enormous opportunities for Western tyremanufacturers. Although the multinational tyre suppliers were very quick to invest in the countriesof eastern Europe, they were much more reluctant to do so in Russia itself. That position is nowchanging with investments by Continental, Michelin and Nokian but recent events illustrating the

capricious nature of commercial law could reverse the trend.

The Russian tyre market, including imports, is estimated to be in the region of 35 million tyres atpresent. Prices of Russian-made tyres have fallen dramatically in the last two or three years as themain producers fight for sales. Western tyres are much more expensive as they are better made andmuch more durable, but there is also a certain cachet in using them for those Russians that canafford them. However, the prestige value of western tyres cannot command the premium across allbrands that it has done in the recent past.

There are 12 tyre plants in Russia but many of them are small and all of them have relatively oldequipment. This is beginning to change as new owners are investing significant capital. Michelinsnew plant at Davydovo is expected to have a capacity of 2 million tyres when it reaches full

production in 2005.

Imported tyres are significant but their importance is declining as Russian companies improve theirquality levels. In general terms the Japanese and South Korean companies are stronger east of theUrals, whilst the European brands predominate in Russia west of the Urals. The four biggest sellingbrands are Nokian, Continental, Matador and Bridgestone.

2.8 Asian Market

Asia is a geographic term for a wide variety of different cultures, climates and countries. Ineconomic terms it ranges from the rich but mature market of Japan to some of the poorest countrieson earth. However, it is growing very rapidly as a region and the tyre market is growing with it. All

the major companies must be active in the area or they will miss out on vigorous growth rates inmost of the countries and enormous potential markets. The market for cross-ply tyres is decliningrapidly as radials are becoming available and new investment is almost exclusively for radial tyres.As in North America and Europe there is a trend towards larger tyre sizes as wheels get bigger andthe demand for high performance tyres is actually higher than in North America.

2.8.1 Japan

The Japanese tyre market is more like the European or North American market than that of anyother Asian country. The maturing market in Japan has provided a growing demand forreplacement tyres, and the tyre industry has become less dependent on OE supply. In 1975 OE

demand accounted for 60% of the Japanese market for tyres but by 2003 this had fallen to 33%.The total domestic market of about 150 million light vehicle tyres has hardly grown at all in the lastdecade because of this decline in OE demand. Four Japanese manufacturers are in the top tenglobal companies Bridgestone, Sumitomo, Yokohama and Toyo and these firms dominate themarket in Japan. Bridgestone alone has a market share of 46% and Yokohama and Sumitomo haveshares of 23% and 19% respectively. Until 1986 the Japanese market was essentially closed toforeign-made tyres, but in that year the vehicle manufacturers instituted voluntary programmes toimport US-made parts. In relation to the domestic market for passenger car tyres, imports haveremained fairly steady at between 11% and 15% over the decade. European sourced tyres havemade little headway into the Japanese market, and South Korea is also finding the market difficult,but tyres made in Taiwan are gaining market share. Chinese imports are also significant.

Distribution channels for replacement tyres are particularly wide-ranging and complex, withvehicle distributors which have taken a leading role until recently, having now been overtaken by


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speciality stores. The chief distribution channels are roughly divided into two types: direct salesand indirect sales. In Japan, the attitude toward buying tyres is different than in the west. To theJapanese, new tyres represent the renewal of a car's life and it's a happy purchase for people wholike to drive. A marked feature of tyre distribution in Japan over the last decade has been the sharpgrowth in discount and auto speciality chains.

2.8.2 South Korea

As in Japan, the tyre industry has grown alongside the burgeoning automotive industry, but it is notreliant upon it. The two indigenous tyre producers, Kumho and Hankook, have established theirbrands with some success in Africa and South America as well as the more mature markets. Thereplacement market is only a little larger than the OE market. In 2003 passenger car tyrereplacements amounted to just under 10m tyres with light trucks accounting for another 2.5m. Themarket for OE tyres was 6m passenger car tyres and 2.5m light truck tyres. Although the nature ofthe market is changing the structure is not, as distribution outlets are tightly controlled by the twolargest companies Kumho and Hankook. Each have their own chains of franchised operations andthese are exclusive to the firm, selling only that companys brands. Hankook has a slightly larger

share of the domestic market, whilst Kumho exports more. The importance of Korea for the worldtyre industry is that it is the home of two aggressive and ambitious manufacturers. The domesticmarket is significant, both for OE supply and, increasingly, for replacement tyres but it is stillsmaller than several European countries. However Korea is no longer a low-cost location for tyrefactories.

2.8.3 India

It is only in the last decade that the Indian economy has begun to open up to the world industry.Many of the multinational tyre manufacturers have shown a new or renewed interest in the country.Both the Indian market and the world market are changing rapidly and some companies,particularly the smaller ones, are finding it difficult to come to terms with the changing

circumstances. In most countries passenger car tyres are the most significant product, but in Indiaproduction of these is dwarfed (in value terms) by output of truck and bus tyres. In total the Indianmarket for light vehicle tyres is smaller than South Korea, but it is still an attractive market forinternational producers because it is a much more varied market than just tyres for light vehiclesand it is growing rapidly. Traditionally, cross-ply tyres have dominated the Indian market butradials are now growing rapidly, particularly for light vehicles.

The tyre industry in India comprises 40 tyre companies, operating 53 factories. However, 12companies account for over 85% of total unit production. Capacity utilisation is estimated at 72%across the industry. At present the largest firm in India is MRF, followed by Apollo and JK Tyreswhich are very similar in size. These are followed by Ceat and, some way behind, Birla and Modi.Goodyear has had a presence in the country for many years and Bridgestone and Michelin nowhave a significant presence, the latter in a joint venture with Apollo. India is beginning to see tyresimported from China as a threat. They are considerably cheaper than home-produced tyres becausethe Chinese have access to lower cost rubber and cheaper labour. One of the biggest competitiveadvantages, however, is the lower cost of finance in China.

The Indian market is huge in geographical terms but hindered by poor infrastructure. Until recentlyit has been very difficult to achieve a truly national presence. Now improvements in the roadnetwork and a realisation by the companies of the value of a national network are changing thissituation rapidly. Most distribution is carried out by wholesalers though MRF, JK, Ceat andGoodyear have built up chains of exclusive dealers.


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2.8.4 China

Chinas progress since it first opened to foreign investment and reform in 1978 has been veryimpressive. Over the past 25 years, its real gross domestic product has expanded at an average of9% per year. Most of the big multinational tyre suppliers are now established in joint ventures inChina, but progress has been slow and difficult and it is likely that continued development will take

a considerable time. Passenger car tyre sales are growing rapidly, but they still only account for aminority of production. Production is spread throughout the whole country, but passenger tyreproduction is concentrated in the coastal provinces, particularly in the regions around Beijing andShanghai. The large companies account for the bulk of production. This proportion is becominggreater, as the small companies find it difficult to compete and are gradually exiting the industry.Currently about 90% of the passenger car tyres produced for the Chinese market are radials, andthat figure should reach 100% by 2005. However, a significant number of cross-ply tyres are stillmade for export. The market for tyres is growing rapidly at about 6-7% per year, but there are toomany manufacturers and they are all trying to survive.

Chinese tyre factories fall into three broad groups. The majority are still old, traditional localfactories. The second group is comprised of about a dozen factories that have recognised their

problems and purchased western machinery in order to improve the processes, but these plants areburdened with so much debt that they are effectively bankrupt, and many have ceased production.The third group comprises both Chinese and western companies. Large domestic Chinesecompanies which have been identified by the Chemical Ministry as key companies and westerncompanies which have established plants in China. It is this third group which will survive andcomprise the tyre industry of the future. The companies, particularly the western companies, areinvesting heavily both in production equipment and, more importantly, in distribution networks.

Most companies are concentrating on the coastal provinces, partly because that is where thefactories are based but, more importantly, because this is the area with the most income. Most havenetworks of several hundred distributors and are aiming for several thousand retail outlets.Bridgestone and a few other companies are establishing a few company owned stores to act as

beacons and exemplars. However, there are still many problems, not just for new businesses butalso for firms that are well-established and which think they know the local market.


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3 Industry Economics

3.1 Introduction

Round, black and boring is a phrase often used about tyres although the industry is quick to pointout that a tyre is a sophisticated product of advanced material engineering. Tyres are the most

complex, important, least appreciated, and least well-maintained component on a car. There are asmany components in a tyre as there are in an engine. But, unlike an engine, you cant take themapart and rebuild them.

Like everything else connected with the motor car, tyres evolve from carefully evaluatedcompromises. They must cope with numerous demands, many conflicting. They must grip, brakeand corner satisfactorily on all surfaces, in all weather conditions. They must have a low rollingresistance to assist fuel economy. They must not squeal or whine too much. They must not flexexcessively under load, yet they must not detract from ride comfort. They must resist punctures andmust not wear out too quickly but they must not be too expensive. And all this has to be carried outwhen the area of contact with the road at any one time is no bigger than a mans palm.

However, the term boring can in no way be applied to the tyre industry. It is a large industry witha turnover of $69 billion in 2002. It is an economically important industry, employing more than600,000 people directly and several million indirectly. It is a ubiquitous industry as virtually everyhuman being on the planet comes into frequent contact with tyres and often regard themselves asknowledgeable on the subject because of this contact. Above all it is a politically sensitive industrybecause of its size, its environmental impact and its multinational ownership.

This chapter examines the structure and chief characteristics of the tyre industry and the majoreconomic and commercial pressures influencing it.

3.2 World Market

The world tyre market grew from about US$30 billion in 1983 to US$70 billion in 1996, but sincethen it has stagnated in dollar terms at around US$70 billion (US$70.55 billion in 2001). However,these are current local prices translated into dollars at the prevailing exchange rate and in recentyears the high value of the dollar has concealed the underlying volume growth. The recent fall inthe value of the dollar should make the total market value begin to grow once more. In volumeterms growth varies from year to year, but over the last decade it has averaged between 2% and3%.

3.3 Industry Structure

The last 20 years have seen a dramatic concentration in the number of major players in the market

five of the ten largest companies in 1981 have now been taken over by competitors. Thisconcentration is continuing, though in a less dramatic manner, with smaller companies formingalliances or being bought out by larger competitors. The latest major development involvesMichelin acquiring a 10% stake in Hankook and the two companies pursuing links in themanufacturing, distribution and R&D areas.

As a result, the three largest companies Bridgestone, Goodyear and Michelin now dominate theworld tyre market with a share of about 56%. These are the only truly multinational companieswith manufacturing facilities and sales networks in most of the world regions.

There then follow four mid-sized companies, which have about 18% of the world market Continental, Sumitomo, Pirelli and Yokohama. These companies usually have a strong presence in

perhaps two or three world regions, but not all. At present Sumitomo Rubber is in this group, butsince its alliance with Goodyear it has transferred assets in both North America and Europe to itsUS partner, and consequently it could be argued that it is now a regional rather than a multinational


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company. The remaining 26% of the market is split between 100 mainly local companies, althougha few of the larger ones have significant export markets (Table 3.1). This applies particularly toToyo of Japan and the two South Korean manufacturers, Kumho and Hankook.

Table 3.1 Global tyre market share 2003

Company % Share

Michelin 19.2Bridgestone 19.1

Goodyear 17.4Continental 6.8

Pirelli 3.8Sumitomo 3.7

Yokohama 3.3

Approx 100 companies 26.7Source: Tire Business

To put these market shares in perspective, the total world market for tyres is estimated to be over$70 billion. The big three producers (Bridgestone, Goodyear and Michelin) all have a salesturnover in the range of $12-14 billion and the next four range between $2.4 billion and $4.8billion. Cooper, Kumho, Toyo and Hankook all sell over $1 billion each year. Between them, theseeleven companies account for 81.6% of the world market (Table 3.2).

Table 3.2 12 Largest tyre manufacturers 2002/2003

Company Tyre Sales US$ billion Tyres as % of total businessMichelin 13.6 95

Bridgestone 13.5 75Goodyear 12.3 89

Continental 4.8 45

Pirelli 2.7 41Sumitomo 2.6 74

Yokohama 2.4 72Cooper 1.7 52

Kumho 1.4 67Toyo 1.3 62

Hankook 1.3 87Cheng Shin 0.6 100

Source: Tire Business

Even though the largest companies have a turnover well in excess of $10 billion, they remainlargely specialist tyre manufacturers. Almost all of Michelin's sales are attributable to tyremanufacture, almost 90% of Goodyear's, and just under 75% of Bridgestones. Many of the smallercompanies also concentrate almost exclusively on tyres. However, the medium-sized companiesare diversifying away from tyre manufacturing. Pirelli has always had extensive interests in cablemanufacturing, Continental has now acquired a large business in automotive chassis systems andCooper has also diversified by buying a manufacturer of automotive components, although it nowseems to have decided that this was a mistake as it is trying to sell the non-tyre business.

The three major multinationals dominate world production patterns with 152 plants in all the mainworld regions (Table 3.3). The smaller international companies have a further 55 plants worldwideand these plants are, in general, much larger and more efficient than the around 200 plantscontrolled by purely local companies. Indeed many of these latter plants are effectively closedeither through lack of investment or because foreign exchange difficulties prevent them fromimporting raw materials.


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Table 3.3 World tyre production facilities 2003

Region Bridgestone Goodyear MichelinOther

InternationalNorth America 11 13 15 14

South America 5 7 5 8

Europe 6 14 31 22Japan 9 1 1 12

Other Asia 8 8 5 25

Australasia 2 2 0 0

Mid east 1 2 1 0Africa 2 2 2 10

Total 44 49 60 91

Source: Company accounts

Note: This table only includes plants belonging to international companies. It does not includeplants owned by firms with plants in only one country.

3.4 Markets by Product Sector

Passenger car tyres are the most well-known product of the tyre industry but they are by no meansthe only product. World production of tyres ranges from lightweight and relatively unsophisticatedbicycle tyres to very large and very expensive tyres for giant machinery such as earthmovers orjumbo jets. Table 3.4 shows the relative size of these markets in terms of value.

Table 3.4 World tyre market by product sector 2003Sector Value US$ billion % of totalPassenger car and light truck 35.9 50.9

Heavy truck 23.4 33.2

Two-wheeler 4.2 6.0

Earthmover 4.1 5.8Agricultural 2.4 3.4

Aircraft 0.5 0.7Total 70.5 100

Source: Bowfell.net

The bulk of the market in volume terms comprises tyres for passenger cars and light trucks, butheavy truck tyres account for more than a quarter of the market by value, and there are alsosignificant sectors for earthmoving vehicles, agricultural vehicles and two wheelers (motorcycles,scooters and bicycles). Some of the smaller sectors such as bicycle tyres are low-tech commodityproducts, but others, particularly earth moving and aircraft tyres, have higher margins than themuch larger markets for car and truck tyres.

3.5 Sector Markets

Unusually, if not uniquely, in the automotive components industry, the tyre manufacturers only sella minority of their output to original equipment manufacturers (OEMs). The bulk of sales are todistributors selling to millions of individuals in the replacement market. The key factor thatdistinguishes the tyre market from any other automotive component is the size of the replacementmarket or aftermarket three quarters of road tyres are sold as replacement tyres and only onequarter as original equipment (Table 3.5).


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Table 3.5 World tyre market by end-use 2003Passenger car tyres (m) %

OEM 278 28

Replacement 716 72Total 994 100

Source: Michelin

3.5.1 Original Equipment (OE) Market

Although it only represents a minority of sales, the OE market is vitally important to the majormanufacturers even though the tyres are sold at very low prices. The vehicle manufacturersstimulate and encourage tyre development and the specification of a tyre as original equipmentgives that manufacturer an advantage when the customer comes to replacing it. However, evenignoring the additional R&D costs incurred, these tyres are sold to OEMs at prices that are barelyprofitable. Although the OE market for light vehicle tyres is 30% of the total in terms of volume, itonly represents 19% in terms of revenue.

The continual drive by the OEMs to reduce their component costs has exacerbated this problem inthe last decade. Several tyre manufacturers have now put profitability before either volume orprestige and have declined to bid for contracts. Most recently Michelin has either not bid for certainnew contracts or has declined to continue with existing contracts because of the very low marginson these contracts. However, the pendulum will swing back as both the OEMs and the major tyremanufacturers need each other. The OEMs know that only the largest tyre suppliers can afford theR&D effort that is necessary when designing tyres for new vehicles. Similarly, the tyremanufacturers like the credibility that association with well-known vehicle brands gives them.

Although only about a quarter of road tyres are specified and purchased by the vehiclemanufacturers, this segment of the market is very important as it drives technical development andit has a major influence over the aftermarket. The regional demand is dictated by the location of the

main production centres for vehicles, namely North America, Europe and Japan (Table 3.6).

Table 3.6 Regional demand for OE tyres 2003

Volume (m units) % of totalForecast annual

growth rate2003-2008

North America 80 28.5 +0.34Europe 89 31.8 +1.5

Asia 96 34.3 +6.2South America 8 2.9 +1.2

Middle East/Africa 7 2.5 +6.2

Total 280 100 +2.9Source: Michelin

The big three tyre manufacturers dominate this market, but other large regional players also have ashare, particularly in Europe. The companies that do not play an important role in the OE marketare small local companies which do not have the technical resources to meet the demands of theOEMs. Thus, even in a country like China or India with a substantial proportion of local tyremanufacturers, the OEM assemblers in those countries invariably buy tyres from the subsidiaries ofmultinationals in that country or from local firms with joint ventures with those multinationals.


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Table 3.7 Market share of major companies in the OE tyre market 2002North America % Europe % Japan %

Big Three 82 58 73

Other majormanufacturers

14 38 27

Other 4 4 0Total 100 100 100

Source: Michelin

As a matter of policy, most OEMs dual source for every model and spread their total purchase oftyres over three or four manufacturers. The bad publicity caused by the Firestone recall in NorthAmerica has resulted in a significant move away from Firestone as a preferred brand. Bridgestoneis making a virtue out of necessity in this by actively encouraging Firestone OE customers toswitch to Bridgestone. Table 3.8 illustrates the variety of suppliers used by the Big Three carmanufacturers in North America. Toyota is also shown alongside the indigenous companies as it isnow approaching them in market share. Interestingly, it has a similar variety of suppliers with no

marked bias towards Japanese manufacturers.

Table 3.8 Tyre supply to North American OEMs 2003 (%)TyreCompany

Tyre BrandGeneralMotors

Ford Chrysler Toyota

Bridgestone Bridgestone 14 0 5 24

Bridgestone Firestone 17 0 0 9Continental Continental 0 15 0 0

Continental General 17 23 0 9

Goodyear Goodyear 34 34 78 14Goodyear Dunlop 0 0 0 27

Hankook Hankook 0 3 0 0

Michelin Michelin 4 15 16 12Michelin BFGoodrich 10 3 0.5 5Michelin Uniroyal 4 2 0 0

Pirelli Pirelli 0 5 0.5 0

100 100 100 100Source: Modern Tire Dealer

The type of tyre specified by the OEMs differs quite markedly from region to region because of thedifferent vehicle mix sold in each market and the different driving habits. This is illustrated by thecontrast between the North American and European OE markets where performance tyres accountfor over 50% of specification compared with only 13% in North America. The popularity of sportsutility vehicles (SUVs) in North America shows up with 33% of specification on new vehicleswhereas in Europe this only accounts for less than 5%, partly because there are far less SUVspurchased and partly because many of these are relatively small and use passenger car tyres.

3.5.2 Replacement Market

Replacement tyre demand for light vehicles is usually less cyclical than OE demand, althougheconomic factors do influence it. Worldwide, the replacement tyre market for light vehiclesrepresented about 714m tyres (Table 3.9). As with OE markets the demand is concentrated in NorthAmerica and Europe which together account for over two-thirds of the market but the developingmarkets, particularly in Asia, are growing rapidly.


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3.6.1 Market Maturity

Although there are cycles of demand, the long-term growth of the industry in volume terms hasaveraged just over 2% per year for the last eighteen years. Over the period, growth has beenvigorous in some regions, particularly Eastern Europe and parts of Asia. However, the two largestregions North America and Western Europe which between them account for two-thirds of

world sales, show the slowest growth as they are mature markets (Table 3.10).

Table 3.10 World tyre industry long-term volume growth 1985-2003

RegionCompound annual growth rate

(CAGR) %North America 1.1

Latin America 5.3

Western Europe 2.2Eastern Europe 7.6

Asia 4.0Total 2.3

Source: Bowfell.net

Growth in terms of value is rather more difficult to assess, as the strength of the dollar against othercurrencies in recent years has tended to flatter some companies whilst apparently handicappingothers. However, an estimate by Deutsche Bank suggests that sales of the industry rose at 4.4% peryear between 1991 and 1998. Since then, however, there has been a turndown in the market andrevenues have fallen, partly because volumes are down and partly because intense competitionleads to larger discounts in the marketplace.

The problems of slow growth and market maturity are exacerbated by cyclical growth in oneimportant sector of the market, supply to OEMs. The OE demand for tyres, not surprisingly,matches the output of the vehicle industry perfectly, and this is cyclical. Despite the poorprofitability of sales to OE customers because of the purchasing power of the vehiclemanufacturers, and even though the replacement market represents over 70% of the passenger cartyre industrys sales, tyre makers profitability is also cyclical. This is because tyre makers have tohave sufficient capacity to support cyclical peaks. A decline in OE demand drives down capacityutilisation rates and this is often compounded by negative pricing trends in the replacement sectoras manufacturers attempt to fill their capacity with extra volume from the replacement tyre market.

In contrast the replacement market is not particularly cyclical. Since 1975 there has only been onetwo-year consecutive decline (in the USA in 1979 and 1980). It is also a relatively profitable sectorof the overall tyre market, but it cannot compensate for the vagaries of the OE market.

A traditional indication of market maturity is continual pricing pressure in the market. Although the

world tyre market appears to be an oligopoly, there are enough small competitors to keep continualpressure on prices. This, together with competition for market share between the multinationals,has typically meant that it has been very difficult to make price rises stick.

As a result, the prices of popular tyres have fallen consistently over a long period. One of thelargest selling tyre sizes in the USA demonstrates this. Average selling prices fell consistentlybetween 1979 and 2000, averaging an annual price drop of 2.3% every year. After 2000 the priceedged up by about 10%, probably because it was not being made in the same volume as before butin the most recent year the price dropped again. In broad terms the tyre which cost $69.90 in 1979was selling for $41.02 in 2003. This simple comparison is enough to expose the problem that alltyre manufacturers have but if inflation is taken into account the picture is much worse. $69.90 in1979 would be the same value as $185.43 in 2003. Electronic goods have declined in cost over that

period but very few other items match the decline of tyre prices. Even cars have increased by 2.5times over the same period.


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3.6.2 Tyres as a Commodity

The maturity of the market leads on to the perception of tyres as a commodity. In most markets thetyre manufacturers try to avoid this perception of their product. because if the consumer can see nodifference between the products on offer, he/she will let price play a greater part in the buyingdecision. Unfortunately for the industry, more than half of all consumers regard car and light truck

tyres as a commodity. This is both surprising and disappointing for the industry in view of thecritical role that tyres play in vehicle performance and the significant commitment that has to bemade to R&D.

Perceived differentiation between tyres of an equivalent grade is minimal, and brand substitution isvery common. The lack of brand loyalty is illustrated by the fact that 67% of consumers in the USand 50% in Europe replace their original equipment tyres with a different brand when the timecomes to replace them.

It is extremely difficult to develop a unique selling proposition (USP) or to sustain productuniqueness in the tyre industry. Consumers generally lack the information, expertise or ability totest and evaluate different tyres independently. In addition, with few exceptions, tyre manufacturers

have proven adept at copying and incorporating technological innovations introduced bycompetitors. To make payback from innovation even more difficult, when one manufacturerintroduces a truly unique feature or design, the OEMs are reluctant to accept it unless it is availablefrom at least one other source. A case in point is the Michelin PAX design which requires a newwheel design for use. This has now been licensed to both Goodyear and Pirelli in order to make itmore acceptable to the vehicle designers.

Together these factors make it extremely difficult for tyre manufacturers to break out of the role ofcommodity suppliers with all the implications of that type of business price competition, narrowmargins and a reliance on aggregate balances of supply and demand. The method that manycompanies have tried in order to break out of this straitjacket is to develop strong brands, but thishas proved to be extremely difficult in the tyre industry. It can be done in specific regions for a

limited period of time, but it has proved impossible to translate this into higher earnings on apermanent basis or to develop this brand equity globally. For example, in India, Bridgestone is arelative newcomer, and it has succeeded in selling its light vehicle tyres at a premium to themarket, much to the chagrin of Goodyear which has had a market presence for many years andcannot command a premium over tyres made by local Indian companies. In Europe, Pirelli hasestablished a good reputation for its high performance tyres, but this has not helped sales of itsvolume products.

Because differentiation has proved so difficult to achieve, market share has remained relativelystable over the last decade on a world scale. The leaders had approximately the same market sharein 2003 as was the case ten years before (Table 3.11).

Table 3.11 World market shares 1991-2003Company 1991 % 1998 % 2001 % 2003 %Bridgestone 17.5 18.7 19.8 19.1Goodyear 15.6 15.4 18.3 17.4

Michelin 20.0 18.4 19.0 19.2Continental 7.2 6.5 7.1 6.8

Cooper 1.7 2.1 3.6 2.4

Pirelli 5.5 4.0 3.7 3.8

Sumitomo 6.2 7.0 4.0 3.7

Total Top 7 73.7 72.1 75.5 72.4Source: Tire Business


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There are variations in market share from year to year but these are probably more the result ofvariations in the exchange rate between different currencies than relative successes in the marketplace.

3.7 Cost Structure

The major companies within the tyre industry are all constrained by the laws of economics andsubject to similar commercial pressures. As a result they react to the business environment insimilar ways at any one time. In very broad terms the cost of tyre manufacture breaks into threeparts: raw materials; labour; and fixed costs (Table 3.12).

Table 3.12 Tyre industry cost structure% of total costs

Raw materials 25Labour 30

Fixed costs 40-45Source: Industry estimates

It is obvious from this simple breakdown of costs that the tyre industry has high fixed costs,making it extremely difficult to improve returns unless costs are cut or market share gained.

Raw materials typically represent 25% of the selling price of a car tyre. Because of the extremedifference in selling prices between the OE market and the replacement market (prices forreplacement tyres are typically about 80% higher than OE tyres), raw materials represent a muchhigher proportion of the selling price of an OE tyre than of a replacement about 40% comparedwith 20%.

The composition of tyres varies greatly so the figures in Table 3.13 can only be a general guide tocost but some general lessons can be learned. The largest raw material costs are for rubbers bothnatural and synthetic as between them they account for over 40% of the cost, but othercomponents, particularly steel cord, are also significant.

Table 3.13 Raw material cost breakdown

% weight % costSynthetic rubber 28 24Natural rubber 19 17

Carbon black 24 15Steel cord 13 18

Chemicals 11 16Fibres 5 11

Total 100 100Source: Deutsche Bank

The price of synthetic rubber is directly dependent upon the price of oil and many of the othermaterials are also very sensitive to this, so any change in world oil prices has a major effect on thetyre industry. Goodyear, for example, states that every $1 change in the price of a barrel of oilaffects the operating profit by $25-30m, with the impact being felt within three to six months of thechange.

A certain amount of substitution is possible between natural and synthetic rubber, but even if thiscould be done quickly and completely, many of the price advantages would be lost as there is a

correlation between the synthetic and the natural rubber price. When the price of synthetic rubbergoes up, so too does the price of natural rubber, and vice versa.


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Light Vehicle Tyres

3.9 Capacity Changes

This continuing drive for improved productivity has resulted in excess capacity in many areas andproduct sectors. Some new plants have been opened to exploit new manufacturing technology andnew manufacturing equipment has been installed in some existing plants. This, as well as leading tomore efficient working, has greatly increased capacity, but until recently the major manufacturers

have proved to be very reluctant to close plants, thereby eliminating higher-cost facilities andreducing overall capacity. This is not so much down to lack of will on the part of the tyremanufacturers but more because of the political and other consequences. Complete factory closureis an untidy and costly (in the short term) business, which almost inevitably raises opposition fromlocal politicians and local and national labour representatives.

One of the first to experience this was Continental in the mid-1990s when it moved production ofcar tyres from Traiskirchen in Austria to the Czech Republic. Even though, when theannouncement was made, there was no mention of the factory being shut down completely, therewere strong objections from the local community. They feared, quite rightly, that this would proveto be the start of a continuing erosion of the facilitys operations. Continental became enmeshed inlong and acrimonious discussions with both the unions and the Austrian government. In late 1998

plans were announced for a doubling of the remaining production at Traiskirchen to 1m tyres peryear in 1999, and undertakings were made for both sides to make their best endeavours to retainproduction at that site. However, it proved to be in vain as in December 2001 Continentalannounced that it would stop all tyre manufacturing by July 2002. As a sop to local opinion, certainmixing and calendaring functions have been retained on the site, but the prospects for this operationcan scarcely be regarded as secure.

Despite the problems involved in closing plants, the pressures to do so have remained and all themain manufacturers have now taken decisive action to make major operational savings (Table3.14

Mullineaux, Neil-Light Vehicle Tyres-iSmithers Rapra Publishing (2010-02-09).pdf

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