Tyres turning around: a trader's transformation

【 Media Coverage 】 Release Date : 2010-11-04 Author : Matilda Editor : Jaime Source : iFeng

In Qingdao, a port city in northern China, which has hosted the sailing events of the Beijing Olympic Games, Tim Liang’s rubber-tire trading company bucked the trend with a 65% increase in export performance last year, despite of the financial crisis. However, Tim has already made up his mind to revitalise the presence of his business by gradually giving up foreign trade business, looking at growth potential in the domestic auto service market.

"It is very difficult and exhausting to start up a domestic business from the scratch, but now it is indeed more and more challenging when it comes to export," Tim said.

The export volume of Crowntyre reached 70 million US dollars last year, and is expected to reach 120 million US dollars this year, but there are always risks behind the high growth.

First, trade protection cases occur all the time. Take the China-U.S. Tyre Special Protection Case in 2009 as an example. In September 2009, the United States, citing the impact of Chinese tyre exports on the domestic American tyre industry, imposed punitive tariffs of more than 30 percent on PCR and TBR tyres from China, rising from 4 percent before the case.

Tim estimates that the case will lead to the bankruptcy of a group of small and medium-sized tyre factories in China, and at least 200,000 to 300,000 workers will be laid off as a result. In addition to the United States, Brazil and the European Union have also imposed trade barriers through their own means, making it more difficult for Chinese companies to export tyres.

According to the data from the Chinese Ministry of Commerce, in the first eleven months of 2009, 19 countries and regions launched 103 trade remedy investigations against China. In addition, China has also encountered 6 investigations from the U.S. Section 337 Investigation, total amount involved about $12bn.

In addition to trade protections, the fact that Chinese trading companies do not hold pricing power of raw materials contributes to the risks. Take natural rubber as an example, China is the largest importer of natural rubber, but the pricing power is in the hands of foreign trade intermediaries and investment capitals.

"At present, the average gross profit margin of tyre sales is only 3 to 5 percent, and manufacturers cannot afford the price hikes. It is difficult for domestic tyre manufacturers to survive, and it will be even harder next year," Tim said.

In fact, since the financial crisis in 2008, senior Chinese government officials have repeatedly stated that the impact of the financial crisis on Chinese economy is essentially an impact on China’s investment and export-oriented economic development mode, and proposed to transform economic development mode and stimulate domestic demand.

The Recommendations for the 12th Five-Year Plan for Economic and Social Development issued by the Central Committee of the Communist Party of China in October this year formally proposed to “promote economic growth to rely on consumption, investment and export coordination”.

For Tim’s company, the pressure from the external environment along with the preferential policy towards expanding domestic demand, as well as the rapidly growing automobile market have provided Crowntyre an opportunity for inward transformation.

"Although exporting is becoming increasingly difficult, the rapidly growing domestic auto market is undoubtedly a huge business opportunity for tyre companies." Tim said.

In 2009, China surpassed Japan to become the world's largest automobile producer, producing a total of 13.791 million vehicles throughout the year. By the end of 2009, the number of motor vehicles in China was 186 million, of which the number of passenger cars was 23.77 million, a year-on-year increase of 31.46%.

The large-scale entry of automobiles into Chinese households brings opportunities to the tyre replacement market. According to Tim, China's tyre replacement market sales volume is about 55 million pieces in 2010. The current growth rate of China's tyre replacement market is around 20 to 25 percent, and it will reach 150 million pieces in the next five years.

For a tyre company, there are two options for developing the domestic market: to develop the manufacturing industry upstream to become a tyre manufacturer; or to develop the service industry downstream to become an automobile service provider.

Tim chose the latter and established the very first Tirecool service chain in 2008, the sales of which is expected to grow by 120% this year. Following the success of the first venture, four more depots was opened in Qingdao.

"The gross profit margin of the first Tirecool depot is between 40 and 50 percent, which is far higher than the  3% to 5% average margin of  the tyre manufacturing industry." Tim said.

In order to grab the early opportunities in the Chinese auto service market, Tirecool plans to open new stores in Qingdao, Beijing and other cities of Shandong gradually. In the future, it will establish 100 stores in first and second-tier cities nationwide.

The Tirecool business model is based on the replacement and maintenance of tyres, at the same time it also provides auto beauty, quick repair and sales of auto accessories. A dozen of tyres including Michelin, Bridgestone and multiple other major brands are placed in the Tirecool depot in downtown Qingdao, as well as accessories including filters, lubricants and in-car accessories.

Tim is very confident in the unique business model of Tirecool in China.

The automobile after-sales service market overseas is very different from the scenario in China. For instance, at tyre chain stores in the United States, tyre sales is the main business, accompanied by car maintenance and repair services. In China, people focus on car maintenance and repair and beauty. “Tirecool leverages on the mature business models in Europe and America. We localise the model and develop it through innovation," Tim said.

Although most of Crowntyre’s current revenue still comes from exports, Tim said he aims to transform the company from an international tyre trader to a major retailer and commercial service provider in a few years."

As a service provider, Tirecool creates more employment than foreign trade export. At present, there are 120 employees in a 400-square-meter Tirecool store in Qingdao.

The shift of Crowntyre’s strategy not only complies with China’s development plan of expanding domestic demand and increasing residents’ consumption, but also might benefit from Other policy objectives proposed by the Recommendations, such as "increasing income of urban and rural residents generally faster" and "gradual improvement of the basic public service system covering urban and rural residents", aim to increase residents' purchasing power and increase consumption.

The automobile industry was listed one of the top ten industry revitalisation plans by the Chinese State Council early last year.

"Our goal is to cultivate China's automobile after-sales service market and build Tirecool to be the number one brand of China's tyre service chain. We aim to become the next Suning and Gome," Tim said.

Source: iFeng