The Expiration Of U.S. Tariffs: An Opportunity For China's Tire Industry

by: Jeffrey Friedland

The global tire industry is increasingly about one country, China. China accounts for about 25% of the world's total output of tires, with the country now being the largest manufacturer, exporter and consumer of tires worldwide.

Overview - China's Auto and Tire Industries

A discussion can't take place about China's tire industry without discussing the country's auto industry, since they're intrinsically linked. Since 2009, China has been the world's largest auto market, but the percentage of automobile ownership in the country on a per capita basis is very low. In 2011, the number of autos per 1000 of population in China was less than 80, lagging behind that of the 600 to 800 per capita in developed countries.

It is estimated that the Chinese automobile market will maintain an annual growth rate of over 10% in the next few years, and the annual growth of China's auto market will exceed 15%. It is also estimated that the replacement tire market in China accounts for almost two-thirds of the country's domestic tire consumption.

The China Passenger Car Association has published data indicating that 18.5 million vehicles were sold in China in 2011. The Association also projected sales of 20 million vehicles in China for this year. Confirming the size and importance of the China auto market, General Motors' (NYSE:GM) Chief Executive, Dan Akerson, has said that China's auto market will reach 30 million annual vehicle sales by the year 2020.

In 2011, the quantity of rubber tires manufactured in China exceeded 832 million, an increase of 8.55% on a year-over-year basis. The number of radial tires produced was 393 million, accounting for over 47% of the total. In 2011, the sales revenue of Chinese tire manufacturing companies exceeded CNY400 billion, approximately US$63 billion.

The Tariff on Exports of Light Tires to the U.S.

On September 26 of this year, tariffs on light vehicle tires manufactured in China and imported to the United States expired. On that day, President Obama was in Ohio, a major tire manufacturing state, campaigning for re-election. With Ohio being seen as a major swing state that will likely impact the outcome of the presidential election, it was surprising that President Obama, in the midst of his campaign, would allow the tariff to expire. A White House spokesman indicated that the tire tariff was allowed to expire because the United Steelworkers Union felt that the provision had achieved its desired effect. I'm not sure what the "desired effect" really was.

The U.S. tariff on Chinese manufactured light vehicle tires was implemented in 2009 at a rate of 35%, but was lowered by 5 percentage points per year, and most recently was at 25%. It had a major impact on China's tire industry, with the tariff affecting $1.8 billion of annual tire exports to the U.S. Imports of Chinese manufactured light vehicle tires to the U.S. decreased sharply once the tariff was implemented, with the first-year decrease approximating 35%. One has to ask the question as to why there were so many Chinese tires exported to the U.S. prior to 2009. A main reason was cessation of the manufacture of low priced radial tires in the U.S. Low cost radial tires made up the majority of Chinese exports to the United States.

After the tariff was enacted, imports from other countries increased substantially, replacing the imports from China. The tariff proved that if a product isn't made in China, and is not practical or too expensive to be manufactured in the U.S., it will be manufactured in, and imported from a low price locale, somewhere.

President Obama, in his January 2012 State of the Union speech, stated that the tariff saved 1,000 U.S. jobs. I'm not sure that the tariffs saved 1,000 jobs, if you include the impact of the closing of Goodyear Tire & Rubber Co.'s (NYSE:GT) Union City, Tennessee, plant in 2011. The Wall Street Journal also reported in January of this year, that the impact of the tariff was negligible because low cost tires were now being imported to the U.S. from other countries, including Mexico, Thailand and Indonesia.

It has been suggested that the expiration of the tariff will have minimal effect on China's tire industry. The primary reason cited is that most Chinese car and light tire manufacturing facilities are already running at full capacity due to local Chinese demand, and there is the inability to quickly increase tire production to meet the increased demand for exports. But, statements and comments by major tire manufacturers lead one to a different conclusion.

Yuki Kawasoe, spokesperson for Tokyo based Bridgestone Corp. (OTCPK:BRDCF), said that the world's largest manufacturer of tires is now preparing for increased competition.

Ni Guoliang, a member of the senior management of privately held Hangzhou Zhongce Rubber Co., which is China's largest tire manufacturer, was quoted as saying that the company is ready to boost its exports to the U.S. As a confirmation of the benefits to China's tire industry from the end of the tariff, that the end of the tariffs could result in tire exports to the U.S. recovering to about 70% of the pre-tariff sales level of 2008.

In late January, Keith Price, a spokesperson for Goodyear Tire & Rubber said,

The tariffs didn't have any material impact on our North American business.

Cooper Tire & Rubber (NYSE:CTB)

While Cooper Tire & Rubber is well positioned to take advantage of exporting tires from China to the U.S., the company has indicated that the advantages of manufacturing in China have diminished due to increased freight and utility costs as well as increased labor costs.

As one of the top eight truck and bus radial tire manufacturers in China, the company is well-positioned to take advantage of the country's future growth.

Cooper Tire & Rubber's China strategy dates back to 2006 when it entered the market. The company has two joint ventures with tire manufacturing facilities in Rongcheng City and Kunshan.

While the company's global strategy has always been focused on the replacement tire market, the company's China strategy has included supplying tires to Chinese automakers. The company's objective in selling to China's automakers is part of its strategy to build its brand within China. With the China market consisting of many first-time auto buyers, the company believes that this strategy will result in tire buyers being aware of its brand, and when the time comes for them to purchase replacement tires, hopefully purchasing the company's tires.

Phil Caris, vice president of sales and marketing at Cooper Tire & Rubber, said that while the company manufactures 78% of its tires in the U.S., the company sees its short-term growth as being about China.

Most of the top 10 tire manufactures in China are not publicly-listed in the U.S. Here are a few investment opportunities that tie to the growth of both China's auto industry as well as the country's tire industry:

Goodyear Tire & Rubber Co. (GT)

Goodyear Tire & Rubber Co.'s second-quarter earnings from its Asia Pacific operations were a record $71 million. The company's global unit sales showed a decrease, with only its Asia Pacific business increasing unit volumes.

These record earnings were achieved even with the startup costs for the company's new China tire manufacturing facility in Dalian City in Pulandian. This new facility was formally put into operation in August. Construction of this new production facility was started in 2009. The Pulandian facility covers an area of 8.4 million square feet, and currently there are approximately 1800 employees at the plant. Goodyear, which operates more than 60 production facilities worldwide, has indicated that the new Pulandian facility is the most advanced factory that the company operates anywhere. It is anticipated that the annual production capacity of the new facility will be 10 million radial passenger tires, 1 million radial truck tires. The company has indicated that it has the objective of becoming Asia's largest tire manufacturer.

A key to Goodyear's ability to take advantage of the China tire market is that it is the first foreign tire maker to be able to construct a tire manufacturing facility in the country. Goodyear established its first representative office in China in 1993 and built its first plant in Dalian in 1994. This first plant could not be expanded due to residential development, with the result that once the transfer of production to the new Pulandian facility is completed, the older facility will be closed.

Sumitomo Rubber Industries (OTCPK:SMTUF)

Sumitomo Rubber (Changshu) Co., Ltd., Sumitomo Rubber Industries' (OTCPK:SMTUF) subsidiary in China, Sumitomo Rubber (Changshu) Co., Ltd., started production of radial auto tires in April of 2004. In June of this year, the company produced its 50 millionth tire in China.

The company operates two manufacturing facilities in China. In July, the company opened its second Chinese production facility, located in Changsha. The company's first Chinese production facility was opened in 2004 in Changshu, which manufactures passenger, light truck and medium truck tires. The company has indicated that the new facility will produce up to 15,000 Dunlop branded passenger tires per day by 2014, and that it expected production capacity to increase to 30,000 tires daily by 2017.

Sumitomo Rubber's principal sales in China have been to auto manufacturing plants operated by Toyota Motor Corp. (NYSE:TM), Honda Motor Co. (NYSE:HMC) and Volkswagen A.G. (OTCPK:VLKAF).

Sumitomo, which is Japan's third-largest tire manufacturer, currently obtains approximately 12% of its global sales from North America. According to company spokesperson Kumiko Makino, the company has no present plans to lower prices or provide discounts for what is being seen as a more competitive market in the U.S. since the tariff has expired.

Asia Carbon Industries (OTCPK:ACRB)

China-based Asia Carbon Industries produces carbon black. With the rubber industry accounting for almost 90% of worldwide carbon black output, most of Asia Carbon's revenues and growth are tied to China's tire industry. While it's a smaller capitalization company, it's an interesting peripheral investment opportunity tied to China's tire industry.

Asia Carbon Industries' revenues for the second quarter of this year were $13.2 million, which, on an annualized basis, is slightly more than the $49.12 million reported for all of 2011. Despite the downturn in China's economy, which has affected virtually every company in China, the company's net income for the second quarter of this year was $1.87 million.

Asia Carbon's shares are currently trading based on a P/E of approximately 1.52. The company's earnings per share are $.13.


The tire industry has ties to the auto industry, both globally as well as within China. Cooper Tire and Rubber, Goodyear Tire & Rubber, Sumitomo Rubber Industries and the peripheral investment opportunity of Asia Carbon Industries, are investment opportunities worthy of investment consideration tied to the growth of China's tire and auto industries. Also worthy of consideration are automakers with manufacturing operations in China, as well as ancillary companies, which will benefit as the Chinese auto and tire industries, both the world's largest, continue to grow.

Investors must also look at the overall Chinese economy. Even with the well-publicized slowdown of business activity in China, the Asian Development Bank (ADB) recently announced that China's GDP growth would be 7.7% for the year, compared with 9.24% for last year. But comparisons are in order. It's generally acknowledged that the eurozone is in a recession with negative GDP growth. U.S. economic activity, despite Friday's slight decrease in the unemployment rate, is relatively stagnant, with estimated GDP growth of 1.7% to 2.2% growth for this year.

The growth of the Chinese economy, with GDP growth above 7% is impressive and is worthy of investor attention. The continued economic growth of China will benefit a number of industries, with China's auto and tire industries being key beneficiaries.

China's recently announced infrastructure stimulus, totaling US$158 billion, with its focus on the domestic economy, should stimulate consumer spending and the country's important manufacturing sector. After the November 8 change in senior leadership of China's government, I expect additional measures will be taken to stimulate the country's economy. Beneficiaries of China's economic stimulus will be China's auto and tire industries.


Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, or with substantial operations in emerging markets, including China, is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.

The companies mentioned, while including major global companies, also includes smaller capitalization companies with operations based in China. While Asia Carbon Industries is a smaller capitalization company, it is a U.S. reporting issuer, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Disclosure: I am long OTCPK:ACRB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in GT over the next 72 hours. All amounts in US dollars are approximations based on the exchange rate used.

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