In contrast to the widespread decline in profits among A-share listed vehicle manufacturers, the performance of A-share tire companies has been continuously climbing this year.

On October 9th, Linglong Tire (601966.SH) released a performance forecast, estimating that the net profit attributable to the shareholders of the listed company for the first three quarters of this year will be between 1.65 billion and 1.75 billion yuan, an increase of 72% to 82% year-on-year. On October 10th, Sailun Tire (601058.SH) also released a performance forecast, expecting the net profit attributable to the shareholders of the listed company for the first three quarters of this year to be between 3.21 billion and 3.28 billion yuan, an increase of 58.52% to 61.98% year-on-year.

The performance of these two leading companies, while not fully reflecting the overall survival status of Chinese tire companies, can reflect the current important development trends of the tire industry and even the automotive industry, including the rise of independent brands and the overseas expansion of Chinese companies.

Although the performance of the leading tire companies has been expected to increase in the third quarter, the polarization between the top and the rest is evident. In the first half of this year, among the 9 tire companies listed on the A-share market, 8 companies including Sailun Tire, Linglong Tire, Senyuan Tire (002984.SZ), Guizhou Tire (000589.SZ), Triangle Tire (601163.SH), Aeolus Tyre (600469.SH), Tongyi Tyre (601500.SH), and S Jiaotong (600182.SH) have achieved double growth in both revenue and net profit.

A report from Yong'an Futures Research Center in August this year showed that in the current production capacity and market share of domestic-funded tire companies in China, the production capacity of the three leading companies, Linglong Tire, Sailun Tire, and Zhongce Rubber, accounts for nearly 30%. In the long run, the concentration of production capacity will become higher and higher.

As upstream suppliers in the automotive industry, leading tire companies are generally closely linked with vehicle manufacturers. Linglong Tire's supporting vehicle manufacturers include FAW Hongqi, FAW Besturn, and other FAW series companies, as well as Dongfeng Nissan, Dongfeng Liuqi, and other Dongfeng series companies. Senyuan Tire's supporting vehicle manufacturers include GAC Aion, Wu Bo, Hechuang, and other GAC series companies. Sailun Tire's supporting vehicle manufacturers include BAIC, Hozon, Zero Run, Great Wall, and other companies.

Regarding the trend of the tire market in the second half of the year, Donghai Securities' recent research report is relatively optimistic. It pointed out that in September, the rise in most raw materials provided strong support for the cost side of tires. Entering October, the price of raw materials will still be at a relatively high level. Many companies issued price increase letters in late September, which had a certain stimulating effect on downstream inventory replenishment. Coupled with the driving force of the "National Day" long holiday travel, it is expected that the overall market demand for tires in October will continue to improve.

The performance increase of a few leading companies does not mean that the survival status of all tire industry companies has improved. In recent years, due to changes in the industry situation, the Chinese tire market is undergoing a brutal reshuffling.

Data shows that in 2022, the automotive industry chain was once interrupted, tire market sales were sluggish, tire inventory gradually increased, some tire companies were forced to shut down or reduce production, some tire companies took the initiative to control production, resulting in tire operation rates maintaining low-level operation, and the corresponding tire output returned to below 900 million.Since 2023, under the continuous implementation of national environmental protection policies, a large number of small and medium-sized enterprises have accelerated their exit. As a domestic "tire manufacturing powerhouse," Shandong Province issued the "Notice on Optimizing the Management of Tire Casting Projects" in August 2023. Under the guidance of policies, backward production capacities have gradually been phased out, and outdated factories have gradually exited the market.

The Economic Observer learned from the National Enterprise Bankruptcy Reorganization Case Information Network that from January to September of this year alone, 17 tire-related enterprises have entered the bankruptcy liquidation phase.

In February of this year, the Third Intermediate People's Court of Shanghai ruled and declared Shanghai Yijia Tire Rubber Co., Ltd. (hereinafter referred to as "Yijia Tire") bankrupt. The court believed that based on the debt situation of Yijia Tire, it can be confirmed that the company is insolvent, unable to repay due debts, and has met the conditions for declaring bankruptcy. Yijia Tire, established in 1990, was once a star enterprise in bicycle, electric vehicle, and motorcycle tires and accessories, with a market scope that once covered Africa, the Middle East, and Southeast Asia.

In addition to this, Beijing Capital Tire Co., Ltd., which has entered the list of bankrupt enterprises, was once among the top 75 global tire companies; the predecessor of Xiamen Haiyan Rubber Co., Ltd. can be traced back to the 1950s and 1960s of the last century, with a history of more than 70 years.

Domestic surpassing, global expansion

The development of the tire industry is highly related to the automotive industry, and the production and ownership of automobiles determine the scale of tire production. Data from the China Rubber Industry Association shows that more than 70% of the current tire industry demand is created by the ownership of automobiles.

Data from the China Association of Automobile Manufacturers shows that in the first half of this year, domestic automobile sales reached 14.047 million units, a year-on-year increase of 6.1%. According to statistics from the Ministry of Public Security, as of the end of June this year, the national motor vehicle ownership reached 440 million vehicles, of which automobiles accounted for 345 million. Data from the National Bureau of Statistics shows that in the first half of this year, China's rubber tire production was 525.92 million units, a year-on-year increase of 10.5%.

According to official data, Linglong Tire achieved a cumulative sales growth of about 11% in the first three quarters of this year, with a significant increase in the sales volume of passenger car tires with higher gross margins; Sailun Tire achieved a historical best level in the production and sales of all-steel, semi-steel, and non-highway tires in the first three quarters of this year, with a total tire product sales volume year-on-year increase of more than 30%.

With the rise of domestic automobiles, the market share of domestic brand passenger car tires has also begun to surpass that of joint venture brands. According to statistics from Minsheng Securities, in the first quarter of 2023, the domestic sales proportion of domestic brand passenger car tires exceeded that of joint venture brands for the first time, reaching 50.5%. In the second quarter of 2024, the domestic sales proportion of domestic brand passenger car tires has further increased to 63.9%.

In addition to the high market prosperity in the domestic market, both Linglong Tire and Sailun Tire mentioned the factor of the overseas market in their performance forecasts. Data from the General Administration of Customs shows that from January to August this year, China's automotive tire export volume was 5.3 million tons, a year-on-year increase of 5.2%; the export value was 90.8 billion yuan, a year-on-year increase of 6.9%.On October 8th, at the General Shares 2024 semi-annual performance briefing, the company's chairman, Gu Cui, stated that the increase in the global motor vehicle stock and the rapid growth of new energy vehicles will continue to drive a strong increase in tire demand. The cost-performance advantage of domestic tire brands is becoming more apparent, with overseas market share continuously increasing, showing a trend of upward penetration. With the steady growth of automobile production and sales, it is expected that future tire demand will remain positive.

Globally, China has become the largest tire-producing country. In 2023, global tire sales reached 1.785 billion units, a year-on-year increase of 2.3%. As the world's largest tire-producing country, China's output of rubber tires for 2023 reached 988 million units, a year-on-year increase of 15.3%.

In the global market, Chinese tire companies are also accelerating their rise. According to the 2024 Global Tire 75 list compiled by the American magazine "TireBusiness" based on the sales of global tire companies in 2023, there are 38 Chinese companies, accounting for more than half, an increase of 2 compared to last year's 36. At the same time, the total sales of the 38 Chinese companies are approximately $38.14 billion, a year-on-year increase of 15.14%, far exceeding the average growth rate of 2.43% for the 75 companies on the list.

It is worth noting that although China's tire production and sales rank first in the world, the profits of domestic tire manufacturers are not high, and "big but not strong" is still a realistic problem faced by Chinese tire companies.

According to the financial report, in the first half of this year, among the tire companies listed on the A-share market, Sailun Tire topped with an operating profit of 2.46 billion yuan, and Linglong Tire ranked second with an operating profit of 1.03 billion yuan. In comparison, the operating profit of the tire giant Michelin's business line in the first half of this year was €1.782 billion (approximately 13.78 billion yuan).

The report from Yong'an Futures Research Center shows that the global tire company competition pattern is divided into four echelons. The first echelon includes Michelin, Bridgestone, and Goodyear. The second echelon includes Continental, Sumitomo, and Pirelli, etc., with only a few Chinese tire companies in the second echelon, and most are still in the third to fourth echelons.

New Phase of Overseas Competition

Despite the vast overseas market, it is not easy for Chinese tires to achieve export volume growth. In July this year, the European Commission announced the imposition of provisional countervailing duties on imported Chinese pure electric vehicles, which has caused great concern in the industry about the path of Chinese cars going overseas. Compared with complete vehicles, the situation of Chinese tires in the overseas market is more dangerous.

Since the beginning of this year, several important overseas markets for Chinese tires have wielded the "double anti" big stick against Chinese companies. On January 4th, the Indian Ministry of Commerce initiated the first anti-subsidy sunset review investigation on truck and bus tires originating from or imported from China.

On April 4th, the European Commission introduced Regulation No. 2023/737, which will re-impose "final anti-dumping duties" on new or retreaded rubber pneumatic tires with a load index exceeding 121 originating from China. On April 5th, the Mexican Ministry of Economy announced that it has made a preliminary anti-dumping ruling on passenger car and light truck tires with a diameter of 13 to 22 inches originating from China.On August 8th, the United States International Trade Commission voted to make an affirmative final determination on the first anti-dumping and countervailing sunset review industry damage concerning the import of truck and bus tires from China. According to the final determination, the existing anti-dumping and countervailing measures in this case will continue to be effective.

Faced with the surging trade barriers, Chinese tire companies have not shown much unease. Over the years, Chinese tire companies have gradually become accustomed to going abroad in a "high-pressure" environment.

As early as 2015, the United States began to impose high "double anti" taxes on some Chinese tire companies, with anti-dumping duties ranging from 14.4% to 87.9%, and countervailing duties ranging from 20.7% to 100.8%. In 2017, the European Union also began to impose "double anti" taxes on all-steel tires from China.

To avoid trade disputes, Chinese tire companies have successively gone abroad to build factories after 2017. According to the report from Yong'an Futures Research Center, 12 Chinese companies have put into production 18 tire factories overseas, with the production capacity of all-steel tires reaching 25.89 million units and semi-steel tires reaching 97.5 million units.

Southeast Asia is the main destination for Chinese tire companies to build factories overseas. In January of this year, the second phase of the General Shares Cambodia project was laid and started construction, with a production capacity including 3.5 million semi-steel tires and 750,000 all-steel tires per year. In May of this year, the first phase of the General Shares Cambodia project has fully achieved production.

In the third-quarter performance forecast, Sailun Tire also mentioned that the company actively promoted the construction of tire production projects in Cambodia, Indonesia, and other places in the first half of 2024, effectively dispersing the risks brought by trade barriers and other factors while increasing production capacity.

For Chinese tire companies, Southeast Asian countries such as Thailand and Vietnam are the producing areas of tire raw materials. Building factories locally not only helps to avoid trade frictions but also helps to reduce manufacturing costs. Data shows that in tire production, natural rubber and synthetic rubber together account for 50% of the raw material cost, which is an important factor affecting tire costs.

However, Southeast Asia has not been a "pure land" for trade frictions in the past two years. In October 2023, the United States Steelworkers Union issued a petition, calling for an anti-dumping tax investigation on the import of truck and bus tires from Thailand. In October this year, the United States International Trade Commission plans to arrange a hearing on the anti-dumping ruling on Thai truck and bus tires.

In this context, the focus of Chinese tire companies on building factories overseas in the new stage is beginning to shift more towards Europe, North America, and other places close to the market. In May this year, the 6 million semi-steel radial tire project jointly invested by Sailun Tire and Mexico's TireDirect was laid in Guanajuato, Mexico. In September this year, the first European factory of Chinese tire companies - Linglong International (Europe) Co., Ltd. officially started mass production.