Pramod Thomas | Mar 14, 2018 | 0
By Gregers Lindvig
For those following the situation here in China, it has been apparent that the semi-depressed state that marked the first half of 2015 turned into real anxiety nearing the end of the year, as a series of macro-economic shifts resulted in investors pulling out as fast as they were allowed, which in turn brought new projects to a halt and drained cash flow from ongoing ones.
At the time of writing this article, we are exactly in the haze between the Western new year and the Chinese one. Everybody is running around closing up the 2015 results and paying visits to business partners to deliver new year greetings and wishes for prosperity in 2016.
To sum up 2015 for the Chinese tyre industry, things simply went from bad to worse. I don’t believe a single factory came out of the year with a better result compared to the previous year, and the new players that chose to launch their lines in 2015 have simply not been able to get going in an already oversaturated production market.
For those following the situation here in China, it has been apparent that the semi-depressed state that marked the first half of 2015 turned into real anxiety nearing the end of the year, as a series of macro-economic shifts resulted in investors pulling out as fast as they were allowed, which in turn brought new projects to a halt and drained cash flow from ongoing ones. The Chinese Government continued the devaluation of the CNY drastically towards the end of the year to relieve some of the challenges exporters were facing, but when tyre manufacturers were still importing natural rubber in USD, it really didn’t have much of a positive bearing for the tyre industry as such.
Just in the last half of the year we saw the stronger factories starting to buy out those that were beyond rescue. We have seen one being kept alive by leasing equipment and workers out to factories in lack of available capacity, we have seen one being bought out and having it’s entire staff replaced, and we have seen others enter into strategic partnerships to try to keep each other alive. Naturally, several of the new factories that were supposed to start production in the last half of 2015 have been indefinitely delayed as well. There are many important factors at play here.
First, the banks basically own most of the factories, and they won’t let them go bankrupt and risk losing a large receivable in their accounts. Second, the local governments that approved the factories when they started up their projects are afraid of having to explain further up the chain why they allowed such a bad business to break ground, as well as the risk of losing tax income and possibly increased social unrest. Third, the country itself doesn’t want to see the dominos start dropping in the manufacturing segment, which is still a major part of the GDP here, even though it is slightly on the decrease towards a more balanced economy.
Calling it Quits
A few factories did call it quits, though, and my premonition for 2016 is that we will see more going that way than in 2015. I hear them all talking about their strategy for killing off each other, which normally includes dumping prices until the others suffocate, but the only problem with that strategy is that there is just too much capacity to kill off before the competition eases up.
It’s easy to do a quick review on which factories that have actually done well – under the circumstances – and have managed to keep expanding and secure cash flow. They are with no exception the ones that have focused on building and supplying their own brand with a clear and controlled market strategy, have had none or a smaller percentage of their turnover from OEM-production (or should we say OEM for Chinese trading companies), and have not been dumping prices. I expect these companies will continue to do well. What is their secret, you say? First of all, they have understood that the shift in the Chinese economy towards services and away from “mindless manufacturing” mirrors the global development and what global consumers require. Price is important, but when the best price is to be had everywhere, it’s important to have something else to offer, and secure that “long-term cooperation” mentioned in all email approaches by Chinese sales staff.
In other news, Cooper also just made it back on Chinese soil before the end of the year, buying controlling interest into the former Guangming factory in Pingdu, north of Qingdao city, with plans to rebuild and start production. At least we have had a stop to all the private branders with their “we produce in the same factory as Cooper” since they left Chengshan. It will be interesting to see how the new investment pays off for Cooper, but I’m sure they have the domestic pull to do well.
I, for one, am looking forward to a very exciting 2016, where we are going to expand our Nordexx tyre range immensely together with our trusted and loyal global partners. First stop of several during the year will be Tyrexpo Africa in Johannesburg, South Africa, running from March 08 through 10. Feel free to look me up for a chat if you have a chance. Best wishes to all of the tyre community with hopes of a prosperous and foremost stable 2016!