◎ Hao Zhangcheng

Challenges – Benefit is poor and demand decreases

The first is the problem of low-speed growth period.

After experiencing rapid growth in the first 10 years of the 21st century, China’s tire industry reached its peak in 2012. Since 2013, comprehensive output, sales revenue and economic benefits all entered a period of low-speed growth. Compared with the economic cycles of other industries, the new normal of economic development in tire industry not only came early, but also lasted long.

From the perspective of output, it was still growing in 2013, but the growth rate gradually slowed down. The sales revenue of the whole industry basically decreased year by year, and the total sales revenue of 2018 was even less than 80% of that of 2012. The price factor in tire sales revenue is strongly correlated with the price of natural rubber. Natural rubber prices fall, then tire prices also fall; tire demand falls, then natural rubber prices also fall.

From the perspective of industry benefit, the profit of tire industry declined year by year, and it reached a very poor level in the past five or six years. Compared with 2012, the profit of tire industry in 2018 dropped by more than 65%, and the average profit margin of sales revenue was only about 2%. In 2018, the profit of the whole rubber industry picked up somewhat, but the profit situation of tire industry was not improved.

Even so, this also included a large amount of non-main business profits. Exaggeratedly, many tire enterprises were supported by non-main business profits, and this situation reached its peak in 2017. If these non-operating profits were excluded, there was almost no profit in the whole industry.

The second is that declining trend is obvious in automobile industry and demand for tires continues declining.

In 2018, China’s automobile production and sales volume showed its first annual decline in 28 years! In the first two months of this year, a more significant decline arose. Affected by this, the demand in tire market would inevitably decline. It could be seen from the industry statistics that in 2018, China’s domestic tire production volume and sales volume both declined, and the demand situation was even more severe.

Shen Jinrong believed that in March, the operating rates and shipments of various factories increased. It should be said that “increase of tire sales volume in the first month after the Spring Festival” is an industry practice. There are two reasons for this “false prosperity” phenomenon:

On the one hand, at the beginning of each year, all tire enterprises and dealers will make promotion surrendering part of the profits, and vigorously create the momentum. On the other hand, the phenomenon with a high probability every year is that the price of natural rubber will rise during the off-tapping period. From the end of last December to the beginning of the Conference, it is conservatively estimated that the current price of natural rubber has increased by more than 20%. This seems to release the signal that “tires will not fall in price, and it may even rise in price”, which will increase the confidence of the market. Retailers believe that tire inventory will not be devalued, and may even earn some money. Cooperating with this, from the end of February to the beginning of March, even in mid-February, the operating rate and sales volume of tire enterprises all have recovery.

Shen Jinrong believed that such market bubble would burst sooner or later, because the total demand was not strong. Entering April, at the latest in May, after the defoliating period of rubber garden in the Northern Hemisphere, rubber output will increase greatly. It is possible to appear the situation the same as last two years - natural rubber experiences several limit down after going through a big market.

The “3·21” Xiangshui chemical explosion accident appeared to support and found a reason for the rise of tire prices in mid-February and the end of March. From the superficial phenomenon, after the explosion accident, chemical enterprises all over the country have been inspected, including auxiliary enterprises. Therefore, it is believed that the price of auxiliary will definitely rise. But what will the actual situation be? The relationship between supply and demand and the actual cost should also be considered. It is supposed to not affect the overall situation.

Changes – The year with the biggest and most frequent changes in the last 20 years

Since 2018, China’s national policies and markets have undergone four changes:

First, the added-value tax (VAT) rate is lowered.

China has deepened VAT reform. In 2018, the current VAT rate for manufacturing industry has been reduced from 17% to 16%. From April 2019, it has dropped from 16% to 13%. Shen Jinrong believed that this policy was good news for enterprises with standardized operation, but had little impact on enterprises with non-standard operation.

Calculating based on the average value-added rate of China’s tire industry of about 20%, if the VAT rate drops by 3%, the burden on enterprises can be reduced by about 0.6%, which will not play a decisive role. The reason is that the cost of raw and auxiliary materials such as rubber and carbon black has increased, so the actual cost of tires has increased by about 5%. The economic benefits of the industry are determined by a combination of factors, and not just the reduction in VAT rate.

Second, the social security fund is collected by tax authority.

Originally, the social security fund of enterprises was charged by labor department, and now it is charged by tax authority. It has little impact on enterprises with standardized employment, but has a greater impact on enterprises with non-standard operation. However, currently, China suspends the levy by tax department. Although the impact of changes in the collection management policy has not yet appeared, this Sword of Damocles will be always hanging over the head, and one day it will have an impact on enterprises with non-standard operation in the industry.

Third, the export tax refund rate has increased.

Since November 1, 2018, China’s tire export tax refund rate has increased from 9% to 13%, with an increase of 4 percentage points, but in fact tire enterprises did not get four points of concession. Just like the previous implementation, the export tax refund was levied 17% at first and then refunded 9%. Tire enterprises actually did not enjoy 8% of the concession, but only about 5%.

In addition, under the strict implementation of actual write-off policy under the Customs processing trade, this policy has little impact on enterprises with higher imported-material processing quotas for processing trade, and has a positive impact on enterprises with tight imported-material processing quotas for processing trade.

Fourth, the U.S. and the EU implemented “anti-dumping and countervailing” tax rate for China’s truck and bus tires.

The implementation of “anti-dumping and countervailing” tax rate on China’s truck and bus tires by the U.S. and the EU has a huge impact on China’s tire industry. Normally, China’s tires cannot be exported to these two markets because of the national uniform tax rate: the EU charges 42 euros per unit according to the quantity, and the U.S. is about 44.99%. China’s tire exports account for a large proportion, and what’s more, Europe and the U.S. are important export markets. According to relevant statistics, in 2017, China exported 3.42 million all-steel tires to the EU, and exported 8.9 million all-steel tires to the U.S., totaling more than 12 million, accounting for about 10% of the total output of all-steel tires in China.

Although the U.S. recently terminated the sunset review on China’s off-the-road (OTR) tire and ended the “anti-dumping and countervailing” measures, the OTR is not at all an order of magnitude compared to TBR.

Chances – Chinese elements will be a highlight

Firstly, the demand for high-end tires for commercial vehicles has changed. The demand for high-end truck and bus tires in China is increasing, and the tire enterprises with strong technical capabilities in China have fully possessed the production capacity of high-end truck and bus tires. It is not modest to say that the tire market with a mileage of 400,000 km is rapidly expanding, and there is almost no gap between China’s tire enterprises and the world’s advanced level in this field.

Secondly, China’s passenger car market is shifting from large cities to small and medium-sized cities and rural areas. The average selling price of passenger cars has been lowered, and saloon cars have been transferred from luxury goods to tools instead of walk and light transportation vehicles. Users will pay more attention to tire performance, safety and cost performance.

Thirdly, developing countries’ economies are overall recovering. It should be noted that last year, China’s tire export delivery value maintained growth. In fact, it was because exports were valued in US dollars, and the growth was more due to the exchange rate factor, while the actual increase in product prices was not much.

Fourthly, the demand structure of tire products in Chinese market is changing.

Fifthly, the Internet has generated and will continue having a positive impact on Chinese tire market.

Sixthly, the technology and management level of China’s tire enterprises are improving, and the technological level of related supporting industries, such as rubber machinery, mold, compounding agent, carbon black, skeleton material, etc. is also rapidly improving.

Countermeasures – Transforming, upgrading and struggling to catch up

The first is to increase scientific and technological innovation. Increase investment in science and technology, strengthen cross-border cooperation, and achieve an industry-university-research cooperation. It is hoped that upstream and downstream enterprises will have an open mind, contribute the best products and ideas, collaborate and achieve win-win.

The second is to effectively utilize big data and cloud computing. Big data and cloud computing may be a sharp weapon to help China’s tire enterprises catch up with the world’s advanced level. The variable data of tire is too large and too much, so if the variable data can be effectively collected and utilized, it will eventually reach a very high level.

The third is to continue developing intelligent manufacturing. “Informatization and industrialization” integration and intelligent factory creation can improve product quality conformity, improve production efficiency, reduce labor cost, reduce energy consumption and achieve intelligent logistics transportation.

The fourth is to develop products that are more suitable for the market. Tire enterprises should focus on the market development trend, unremittingly promote product structure adjustment, and exert efforts in four aspects: improving product level, enriching product categories, guiding new product consumption and increasing product added value.

The fifth is to create a green circular economy, and realize the harmonious symbiosis between human and nature. Enterprises are duty-bound. Tire environmental protection mainly involves two aspects: the first one is the green environmental protection in manufacturing process, the biggest problem at present of which is to eliminate the odor; the second one is the green environmental protection of tire itself, and comprehensive and recyclable utilization should be achieved. It is a complicated and systematic project that how to recycle and how to utilize waste tires while not cause secondary pollution. The project itself may not be profitable, but enterprises should assume their due social responsibilities.