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Coronavirus and China’s Tire Industry: Latest on the CoronaVirus (CoViD-19)

Coronavirus and China’s Tire Industry: Latest on the CoronaVirus (CoViD-19)
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Hello. Welcome to the first issue monthly edition of Latin Tire eNews.  This bi-lingual publication will bring you news and articles related to the tire and aftermarket auto parts industry. We hope that you like the publication and request that you please send us articles from your local industry, advertisement (free of charge) and comments. We will publish them under your name and company. Good Business To All. – Gus Lima

Against our expectations, it looks like China’s tire industry is returning to some kind of normality, despite some serious short-term headwinds. These include limited domestic demand, because most tire stores are closed, while vehicle makers in China are also only just starting to ramp up production after the enforced break. Another factor is the lack of workers (see detail below). The third factor is raw materials, however, it is not expected that restrictions on raw material supply will have any significant impact until the end February at the earliest. Most tire factories across China were allowed to re-open from Monday 10th, and at least some of them are already making tires.

Bridgestone said, “At this time, we’ve had no significant impact to our operations and personnel in the China & Asia Pacific region.” The company added the following detail:

• Wuxi Plant: Re-opened on 11 Feb.
• Tianjin Plant: currently undergoing internal assessment and is expected to re-open soon
• Shenyang Plant: Plans are in place to re-open on Feb-17
• Huizhou Plant: Plans are in place to re-open on Feb-17

Hankook said all its three plants (in Jiaxing, Jiangsu and Chongqing) have received permission to re-start and have begun operations. The company played down fears about significant disruption, saying it is monitoring the situation carefully and responding dynamically to the changing business environment.

Sumitomo said production at the Hunan Plant began on Feb 10, and the Changshu Plant began production on Feb 12. The company said that more than half of its workers had returned to the factories (see commentary below).

Continental issued a generalized statement saying, “Of the plants in China for which we had planned to resume production on February 10, the majority did indeed return to production on that date, in accordance with current official regulations and approvals by the respective local authorities.

Workers don’t always return after New Year
It is an annual phenomenon that tire workers from different Provinces across China return home ahead of the New Year holiday. A substantial proportion do not want to return after the break. In the past, companies have laid on buses to bring workers back and added incentives for workers who return.

Those workers are often housed in tightly packed dormitories located adjacent to the factory. This year it was not possible to lay on buses because of restrictions on travel, and furthermore, people preferred to remain with their families rather than return to the dormitories where they might catch some illness from fellow workers. While office workers and sales staff are working from home, there is now a shortage of workers in the factories across Shandong, and tire manufacture is one of the less attractive jobs in the area. In order to attract workers, wages are going up sharply. We believe this will drive a demand for price increases as soon as the crisis starts to ease. Where tire makers have overseas capacity, all production is being transferred to the overseas units, and then prioritized, as there is not enough capacity in those units to meet all the demand. However, some of the plants outside China have also been affect-ed by the outbreak. Kumho closed its three factories in Korea for a couple of days due to the outbreak. All three re-opened on 10 Feb. We anticipated that the situation would accelerate consolidation in the tire industry, and this is confirmed by detailed analyses this week from the CRIA and from SCI99.We now think that the crisis will also accelerate overseas expansion by Chinese tire makers and will further increase demand for low-labor-intensity manufacturing systems (automation).

“We are very prudent about the potential consequences of this situation. we know that our sales will be negatively impacted during February. Beyond that it is extremely difficult to guess what is going to happen.”

Inventory situation
The inventory situation in China is mixed. Goodyear and Michelin both said in their annual results briefings that they had experienced strong sales in China in Q4 of 2019 and even into the first few weeks of 2020, so stocks were low. This meant they were expecting to replenish those stocks in the weeks after the New Year break. On the other hand, domestic manufacturers said stocks were high, due to weak demand. We think this means demand for premium car tires was strong, (Goodyear and Michelin) leading to low stock levels; while domestic demand for truck tires was weak, leading to high stock levels. Michelin’s CFO, Yves Chapot said on Tuesday evening that Michelin had re-opened its three factories in China on Monday (10 Feb). He continued, “We are very prudent about the potential consequences of this situation. we know that our sales will be negatively impacted during February. Beyond that it is extremely difficult to guess what is going to happen.”

“Since we expect domestic demand to be extremely weak, we strongly believe output from those factories will be substantially reduced.”

He said that the Chinese factories serve domestic demand, and that output would be adjusted to meet demand. Michelin did not respond to our requests for further information. For Goodyear, CEO Rich Kramer said in an analysts’ call on Tuesday, “Our manufacturing plant in Pulandian restarted operations on a limited basis yesterday (Mon 10 Feb) and it’s clear that production and demand will be affected during the first quarter.” Kramer added, “the channel inventories [in China] are pretty heavily exposed to the China chemical industry. Many of the small chemicals such as accelerators, anti-degradants and other materials used in the tire industry are also made in China. On the other hand, China is a net importer of rubber polymers, silica and other materials used in the tire industry. In another development, many ships bound for Shanghai /Hong Kong and other ports in the region have been diverted in-route. Even if goods are made and transported to the ports, there may be insufficient ships to transport them to Europe or the US. The third factor in this balance is that small chemical factories have been asked to convert production to disinfectants and other chemicals, to meet the need of the authorities for large-scale spraying throughout cities every night. As a result, we think that tire factories around the world are likely to see shortages of some small chemicals. Not all suppliers of pre-dispersions and other downstream products have been entirely transparent about the source of the active ingredients in their materials. We suggest users of such materials might want to investigate the source of their small chemicals and to make provision for alter-native sources of supply, in case shortages start to bite at some point – probably during March.

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