For the first 1700 years the two largest economies of the world were always those of India and China. The last three centuries of Western domination of world history have therefore been a major historical aberration. All historical aberrations shouldcome to a natural end. As such it is now the turn of Asia, and in particular India and China, to take their rightful place on the World economic stage. These economies have been observing and analyzing (lengjing guancha as Deng Xiaoping -China’s erstwhile leader – advised ) patiently and now have understood how to better implement the so-called pillar of Western Wisdom – the free market economy.
Amazingly, while the belief in the virtue of free trade is diminishing amongst the populations of Europe and America, it is increasing in Asia. This is why the largest Free Trade Agreements (FTAs) are now being signed and implemented in Asia,including the ASEAN-China FTA and the ASEAN-India FTA. The fastest growingtrade flows are also in Asia. In our industry like in many others, Europe and America are focussing on legislation and tyre labelling laws to act as quasi trade barriers rather than encouraging free trade. Before we get on to discussing this further let me tell you a little bit more of what is happening in Asia and how that will affect tyre labelling. As you all know in our industry the major investments in factories are being placed in India and China. Just look at the investment Michelin alone has made in India. Every global player of any substance has a manufacturing presence in China already. In fact China has already generated a top ten world player in our industry – Hangzhou Zhongce. I am sure by 2025 we will have an Indian player in the top rankings as well. The shift in power to Asia is therefore here and I am sure willover time be irreversible.
The world is going to be a completely different place in 2025. For example, people will be saying then that to visit a city of past, go to London; to visit a city of the present, go to Dubai; and to visit cities of the future, go to Shanghai or Mumbai. The most optimistic young people will not be found in the West. Instead, they will be found in India or China. Neither Europe nor America will be in a position to impose unilateral trade or economic sanctions on the rest of the world. Instead, both will work hard to create stronger ties to Asia to protect their long-terminterests in a world where the West represents a tiny percentage of the world’s total population. By 2025, there will be no doubt that the 21st century will be the Asian century. So how does this affect us in the tyre industry and in particular tyre labelling.
Well over the last few years the trend that has been really motoring along in the tyre industry is the emergence of Economy brands and the increase in both the quality and quantity of their production. Where are all these tyres made? Asia. So an Asian Century will also mean the century of the Economy brands. This is good for the industry as There are NO Bad tyres – All Tyres are good – Some are just better.
Today the number 10 factory in the world is HangZhou Zhongce Rubber Company in China. This is a factory that is commonly associated with building Budget or Economy brands such as Westlake. But today it is ahead of more ‘legacy’ brands; Infact few people know that in terms of Truck Radial Capacity it is the fourth largest producer of truck radial tyres in the world. A factory cannot get to this level of being a world class producer without being a quality producer – not in our industry anyway! If you then go down the list of the next ten producers there are again more producers of budget or economy brands. In fact legacy brands are actually also making their tyres in the Hangzhou factory and many others in China.
Over the last few years the quality of the factories have improved tremendously. All the factories are buying latest equipment from Europe and the USA to expand their lines and a lot of the equipment manufacturers for tyre making equipment have also set up shop in East Asia to cater to their demand. When one sees the shining brand new factories in China one can see why with their new equipment and new moulds and presses they can easily produce a better quality tyre than the legacy brands. I personally visit Chinese factories over seven times a year and the marked quality of improvement I have seen in these factories is rather commendable. This is not only in the major economy brand manufacturers but also in those that were previously classified as the second tier of these budget manufacturers. These factories are investing in the latest testing equipment to ensure that their tyres conform to the various standards in all the countries in the world that they are marketing to. They are also investing in quality people and ensuring that they start conducting Research and Development in house. Gone are the days of what people assumed was just copying the legacy brands. These factories are now developing in house talent with numerous engineers dedicated to developing the latest patterns and ensuring tyre safety.
Infact now in Europe the Economy brands really are taking a large piece of the pieso much so that the legacy brands seem to be fighting back through increased regulation. The economy brands are in a growing market and are doing this by eating the market share of the declining legacy brands. Currently 52% of the tyres sold in the UK are Economy brands and that is only increasing.. In France that is 28%, Spain 20%, Italy 20% and Germany 20% in Summer and 10% in Winter. But the growth in the economy segment is over 20% a year. This compared with a decrease on the legacy brands in many segments. In Europe as a whole the numberof tyres sold is just above 350 million tyres. So if Europe went the way of the UK about 175 million tyres sold in Europe could be budget tyres! Now that is a growing market! And that is a scary prospect to Legacy manufacturers – hence the increased regulation being lobbied for.
The first of these was to introduce the Clean Oil / REACH / PAH Regulations. Some say that this regulation has had little effect on the environment but that is a whole other debate. But what this has meant is that the economy brand manufacturers have had to set up separate lines of production using different ingredients especially made for Europe. This has increased their costs and reduced their efficiency. The legacy brands thought this would halt the increase of the Economy brands in Europe. Although there were some initial adjustments most of the manufacturers have managed to ensure that their tyres are Reach compliant.
The reason that I mention this is that the same is with the Tyre Labelling Laws – I believe that it is really just an increased trade barrier to curb the growth of Economy brands into Europe. The legacy brands were hoping that this will show consumers that their tyres are better than the Economy brands and as such they should pay more for them. In fact what has happened is that the major economy brands have been working hard, including changing many moulds and patterns to ensure that they will hit the levels close to the major legacy brands in this segment. Infact I believe that this tyre labelling regulation in the EU will allow economy brands to increase their presence in the EU Market and perhaps even increase their price. As brands will become less important at the retailer, especially in markets like the UK which don’t have a strong local producer, people will prefer to buy the cheaper tyre if the grades are the same. In fact the major beneficiaries will be the premium budget brands like Infinity and Westlake which will now be able to justify their premiums over their lower priced competitors. Economy brands have reached C and C and some patterns they are B as well. Where they have not reached this yet I have personally seen the plans in place to get this in place in a short time. Some of the major brand patterns have not reached beyond C and C yet and are selling tyres with C and E as well.
For example research has shown that the most expensive example of one popular tyre size (195/65 R15) for a Volkswagen Golf 1.6 TDi is about 120 per cent the price of the least expensive. The spread of prices is further evidenced by the fact that the most expensive tyre is around 60 per cent greater than the median price. Much of the talk pre labeling centered on how established brands could use the initiative to justify their higher price – in extreme cases, well over double the price – over those tyres coming from emerging markets. It seems clear now that if you have Asian tyres at C C and premium tyres at C C then it becomes difficult to justify such a premium.
So will the performance reassurances provided by the label on budget tyres force more expensive mid-range and premium brands to discount? I believe that manufacturers with large sales of V and lower-speed rated tyres are the most opento price pressure resulting from labeling. Put Simply, consumers who drive more expensive cars will be less likely to consider price as a more important factor in making their tyre purchase. Hence my cut off on V and lower speed ratings. Analysis of the market, done by Infinity Tyres, suggests that Michelin and Continental are of the top five manufacturers most active in this category, with 70 and 65 per cent of consumer tyre sales coming from this segment. The analysts reason that should economy brands’ rankings be able to challenge the quality levels perceived by the consumer Michelin would have the most to lose. Conti has some protection because it has more exposure to the Winter markets in Germany.
So is it all doom and gloom for the Legacy manufacturers? Not at all! I do believe that the labeling regulations will primarily be focussed on the consumer choice aspect rather than the premium Original Equipment manufacturers. I think that the original equipment fitments on premium cars are more or less exclusively the preserve of premium tyres. And just to be clear whilst Hankook is an Asian player I think that they are firmly established as a premium player today. In addition to conformity of brand equity between car and tyre, one major reason for this is the rigor of testing and the far larger number of performance indicators – other than wet grip and rolling resistance – generally used for determining a tyre’s suitability for premium OE fitment.
To take an extreme example, Michelin’s 225/40R 18 Pilot Alpin PA4 tyre was granted N-specification by Porsche, meaning it had to clear a high performance bar in dry handling and braking, longevity, hydroplaning, internal noise, and many more in addition to fuel efficiency and wet grip. On the tyre label, this tyre is awarded EC. More than one Asian manufacturer of budget tyres has comparably sized tyres that equalled and surpassed this rating.
Anyhow I would like to leave you with one final point on why I think that Labelling regulation is tantamount to trade barriers against Asian Manufacturers and that is The Largest Tyre Manufacturer in the world by units, based in Europe, is exempt from all tyre labelling regulations. That is LEGO!