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April 03, 2006 02:00 AM

´Trip´ to China worth taking, experts say

Miles Moore
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    HILTON HEAD ISLAND, S.C.-"Go East, Young Man" has been the advice for years for tire and auto makers seeking to expand their shares of the world market.

    And it´s going to remain the smart tip, according to speakers at the 22nd Annual Clemson Tire Industry Conference, held March 15-17 at Hilton Head.

    China officially became the second-largest vehicle and tire market in the world in 2005, and before too long will be the largest, according to Dennis M. Byrne, professor emeritus of economics at the University of Akron. India´s market is relatively small compared with China´s, he said, but also will be a major growth engine in Asia for the foreseeable future.

    However, those who would do business in China need to remember the vagaries of the Chinese market system, particularly the Chinese government´s insistence on controlling every foreign business venture there, according to Donald L. Brown, market development manager-Asia Pacific for tire reinforcement fabric maker Performance Fibers Inc.

    The outlook for the tire industry is generally good, thanks to strong worldwide demand and a strong economy, Byrne said.

    The industry continues to face some major challenges, such as spiraling raw materials costs; political unrest in such important countries as Indonesia; excess capacity; increased competition from low-cost countries such as China and India; and "legacy costs" (pensions, health care, etc.) in the developed markets of the U.S. and Western Europe, he said.

    On the other hand, technological advances, potential new markets and a changing product mix with greater opportunities for niche markets are keeping the industry thriving, Byrne said.

    "One thing that´s been really good for tire manufacturers is that they´ve been able to raise prices and make those increases stick," he said.

    Auto industry the key

    The fate of the tire industry is tied to the auto industry, and in North America the auto industry is extremely mature, Byrne said.

    "There are more registered vehicles in the U.S. than there are people to drive them," he said. "General Motors and other North American vehicle manufacturers can make enough money elsewhere that they can maintain slow growth."

    But new products cannot hide the problems, he said, and more and more the solution is to offer fewer nameplates and fewer models, rather than new products, which means plant closures and layoffs.

    "GM is struggling, and may fail," he said. "Meanwhile, vehicle manufacturers are putting intense pressure on original equipment suppliers to keep prices down."

    Europe is seeing stronger growth, but the European market is essentially the German market, much of which is for export, Byrne said. In any case, the developed markets are pretty much saturated, which makes Asia-other than Japan, where the market is flat-the place where tire and auto makers can find new markets.

    In the intermediate future-10 years or so-China will surpass the U.S. in tire production, according to Byrne. This is not only because China is one of the very few places where new tire plants are actually being built, but because China´s plants are by definition more efficient than the older facilities of North America and Europe.

    "In Great Britain, there are tire plants built in 1898 that are still in operation today," he said.

    "Even with retrofitting, that plant won´t be as efficient as a retrofitted plant built in 1994. The old tire plants in the U.S. and Europe were six or seven stories high, whereas a new plant in China will be only one story, but cover one square mile."

    Asia has half the world´s population, Byrne noted, and with personal income growing in China and India, the continent is on the verge of a real consumer revolution. "The U.S. will still be much richer per capita, but China still will be the world´s largest economy in five years," he said.

    Less can be expected out of South Korea, which is extremely advanced both economically and technologically but is a very small country, Byrne said. Russia and Brazil, he added, could become major growth areas in the future, but not now.

    "The Russian economy is stagnating," he said. The Putin government is moving back more and more to the old, centrally planned economy, he said, though it´s unlikely to go all the way back to the Soviet system.

    Continental A.G. pulled out of a Russian venture, he said, when the only workers it could get were those who came up during the Soviet days. But Michelin, building a plant in a distant part of the country and staffing it with young, enthusiastic workers, had great success.

    Brazil is more business-oriented than Russia, but its inadequate infrastructure and extreme income disparities remain major problems, Byrne said.

    Ignorance isn´t bliss

    In any case, the biggest problems for companies abroad remain their own ignorance and arrogance, Byrne said. "We never learn the lesson that if you go to another country and try to compete, you have to learn how their markets work," he said.

    This problem isn´t limited to U.S. corporations, as Bridgestone Corp.´s struggles after it purchased Firestone demonstrated, he said.

    For companies coming to China, the most important point to remember is that the Chinese government won´t allow any foreign company to own a Chinese venture outright, according to Brown.

    "It´s a very complex situation in China," he said. "Multinational companies must form a joint venture with state-owned entities, and the largest amount of any venture the multinationals are allowed to own is 50 percent, so that the Chinese government maintains control."

    Some foreign firms have not been willing to do business with China on those terms, Brown said. Continental had a memorandum of understanding to form a joint venture in China, but the deal fell through because Conti couldn´t get a majority interest.

    Most other international tire makers, however, have joint venture plants in China now, as do the vast majority of international auto makers. Foreign vehicle manufacturers have invested $20 billion in China since 1994, Brown said.

    There are now approximately 300 tire plants in China-60 of which have U.S. Department of Transportation codes-and tire production there is increasing by an average of 20 percent annually, Brown said. Tire companies are even starting to get involved in Chinese auto manufacturing, he said; South Korea´s Kumho Tire Co. Inc. has purchased a 10-percent interest in the state-owned Chinese firm First Auto Works.

    Major tire companies are opening company-owned stores in China, though the level of knowledge at those stores still is not high, Brown said. Chinese tire dealers generally know nothing about run-flat tires-though Goodyear has introduced them in China-or the carcass materials in any tire, he said.

    "If you ask most people in China which tires are the best, they´ll usually say, ´Michelin,´ " Brown said. But Michelin tires also are the most expensive in the Chinese market, averaging about $94 per tire, he said. Hankook tires, at about $65 each, are considered the best value, while the Chinese GT Radial brand is the most popular economy tire at about $37.

    However, some problems loom that may hamper the growth of tire and auto production in China, Brown said. For one thing, the new U.S. tire testing standards under the Transportation Recall Enhancement, Accountability and Documentation Act are causing concerns in China. "Some Chinese manufacturers can´t meet those standards," he said.

    Another problem is that it´s expensive to buy and drive a car in China, Brown said. Despite the much lower wages of Chinese workers compared with those in the U.S. and Europe, Chinese-made cars bearing Cadillac, Honda and VW nameplates are anywhere from 30 to 80 percent more expensive in China than they are in the West, he said.

    In addition to these expenses are purchase fees equal to 9 percent of the sales price of the car, an average of $650 for driving lessons and the license, $75 for tags, $150 in annual road fees, and $750 a year for parking.

    Gasoline in China costs roughly what it does in the U.S.-about $2 to $2.30 per gallon-while in Hong Kong gas prices reach European heights, at $6.10 per gallon.

    Furthermore, there is only one legal parking space in China for every five vehicles, he said.

    "The parking shortage could limit sales growth," he said.

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