Sumitomo Rubber Industries Ltd. is one of the powerhouses of the global rubber industry. The world´s sixth-largest tire manufacturer with $4.59 billion in sales in 2006, and No. 2 in Japan, the Kobe, Japan-based company enjoyed 7.6-percent growth in net earnings on 4.1-percent higher sales last year. However, operating income slipped 26.3 percent in 2006, in large part because of materials price increases, and all of Sumitomo´s sales growth happened outside its home turf.
Sumitomo Rubber President Tetsuji Mino discussed the firm´s results, current plans and future hopes in a recent interview with Roger Schreffler, Rubber & Plastics News correspondent.
The following is an edited version of that discussion.
What is Sumitomo Rubber´s business outlook in 2007-sales, earnings?
We are projecting 3-percent growth in sales and double-digit increases, 20 and 10 percent, in operating and pretax income. However, we´re also looking at a 29-percent shortfall in net income. Reflecting this downturn, we are projecting a 5.4-percent drop in return on equity from 14.7 percent last year to 9.3 percent in 2007.
What steps will you take to address this business environment?
One immediate measure we´ve taken is to raise prices in hopes of improving profit margins. Keep in mind that this is an industry problem, it is not just one that affects Sumitomo Rubber. And it is not just a problem for the Japanese market. It´s global.
In February, we raised prices in the domestic market by an average of 5.5 percent, as did Bridgestone, Yokohama and Toyo.
What is the outlook for high performance tires?
This segment is growing both in Ja-pan and overseas. One reason is that luxury car makers are switching to 17-, 18- and 19-inch tires as standard.
What is your Asian market strategy in China, India and Southeast Asia?
We currently have tire plants in Thailand, Indonesia and China and no plant in India. Our Thai plant, located in Rayon Province and run by our subsidiary, Sumitomo Rubber (Thailand) Co. Ltd., went into operation last November. By 2008, we expect to produce 19,000 tires per day, around 6.6 million units annually, all radials for passenger cars and SUVs. By 2010, we plan to boost daily output to 43,000 units.
In addition, we are constructing a second plant on the site which is scheduled to go into operation this November. Capacity will be 30,000 units per day in 2010. Combined capacity of the two plants, if we meet our 2010 forecast, will be 73,000 units per day, or 25 million units annually.
This will be one of the world´s largest tire production complexes and even next year, 2008, will generate sales of Y34.8 billion, two thirds of which will come from the No. 1 unit. By 2010, we estimate that cumulative investment in the No. 1 plant will reach Y43.8 billion
Meanwhile in China, we entered into two joint ventures with Hwa Fong Industrial Co. in 2002 and opened a pair of plants two years later in Changshu, near Shanghai, in the eastern part of the country. Actually, Hwa Fong´s share in the venture (called Sumitomo Rubber Changshu Co. Ltd.), which produces and sells tires in the domestic market, and Sumitomo Rubber Suzhou Co. Ltd., which produces and sells tires for export, is only 6 percent, thus it is almost a wholly owned subsidiary.
On a revenue basis, the (Chinese) operation-both Sumitomo Rubber Changshu and Sumitomo Rubber Suzhou-reported sales of Y13.2 billion ($112 million) in 2006, nearly double the previous year´s total, and we expect to double sales again this year to Y26.1 billion ($222 million).
On balance, we are optimistic about the Asia market. Growth potential is enormous.
Then Asia certainly will grow as a percentage of Sumitomo Rubber´s global tire business?
Without question. We are forecasting worldwide growth in tire sales of around 60 million units by 2015 (from 2005 levels), from 80 million to 140 million. The Asia market will account for nearly 60 percent of that growth, thus around 35 million units annually.
At present, Japan accounts for nearly 60 percent of Sumitomo´s global tire business. By 2015, we expect the Japanese market share to drop to 35 percent.
By region, Asia will grow to an estimated 50 million units annually in 2015, nearly tripling last year´s 15-million-unit total, while Japan will grow marginally to 48 million units, from 43 million last year. North America and Europe, in the case of Europe thanks to increased demand in Russia, will grow respectively to 26 million and 15 million units, from 11 million and 5 million last year.
Most analysts expect new car demand to grow most strongly in Asia. You surely must be focusing your attention on the Asia region. Will you build any new plants there?
We have made no decisions but, as mentioned, will open a second plant in Thailand at the end of this year. For the time being, that should offer us sufficient capacity. But to answer your question, by 2015 we will probably need to add two or three more plants. We will make our decision after 2010.
Apart from China, do you expect sharp growth in other BRIC countries-Brazil, Russia and India?
Yes. But we also cannot lose sight of the fact that the U.S. market is still the world´s largest (on a single country basis) and will remain as such as we move forward. And unlike Japan, the population in the U.S. is still growing. Thus, we expect demand for new cars to continue to grow.
Do you feel that Sumitomo´s joint venture with Goodyear is enough to meet needs in North America and Europe where your market share is small? Do you plan to change that arrangement, in which Goodyear produces Dunlop tires on a consignment basis in North America and Europe and Sumitomo Rubber produces Goodyear tires in Japan?
We have no intention of making any changes in our relationship with Good-year, and we will not produce tires by ourselves in North America or, for that matter, Europe. We will rely on Good-year. Any capacity increases will be in the context of the joint venture.
Might you expand sales of your Falken brand in the market, which you acquired when you took a majority stake in Ohtsu Tire & Rubber Co. in October 2000?
It is possible, but our basic policy is to stick with Goodyear.
Do you have any other new businesses in Asia?
In March, we opened a plant in Vietnam which makes small rubber components for office equipment including laser printers and photocopy machines.
According to your mid-term plan, you are projecting sales of 140 million tires in 2015, up from around 80 million last year. Do you feel that might be too aggressive?
We believe our forecast is reasonable, neither too optimistic nor too conservative. We believe 140 million units is attainable, though there are various external factors which could have an adverse effect on demand.
In the short term, our biggest problem is rising material costs, particularly natural rubber prices.
What is the long-term outlook?
It´s hard to say. But if we look back, natural rubber was extremely cheap in the latter part of the 1990s. This was due to the fact that producers in Thailand and Indonesia were able to reduce costs substantially. Then demand picked up, and price increases followed.
We expect supply to come back into balance with demand and for prices to stabilize. But for the moment it´s going to be tough going.
Looking at the Asia market, which segment, original equipment or replacement, is likely to drive growth?
In terms of volume sales, there is no question that the replacement market is larger. Granted, new car demand is increasing dramatically in China, but even this demand, basically first-time car owners, will eventually turn to the replacement tire market.
Sumitomo Rubber has a long and close relationship with Toyota, its share of Toyota cars built in Japan standing at an estimated 30. Will you follow Toyota to China?
Of course, but not just Toyota. The reputation of Japanese auto makers is growing around the world. So naturally we want to continue to supply them wherever they go.
Sumitomo Rubber Changshu began supplying tires to Tianjin FAW Toyota Motor Co. in June 2005. In Japan, Sumitomo Rubber supplies all Japanese car makers. Its share in the Japanese original equipment tire market was estimated at 27 percent in 2005, which compared to Bridgestone Corp.´s 36 percent and Yokohama Rubber Co.´s 18 percent. Included in the Sumitomo Rubber share were tires produced by Osaka-based Ohtsu Tire & Rubber Co., a subsidiary.
In the environment field, what is the current situation with your eco tire program?
We began selling a 70-percent petroleum-free tire last year, the Enasave ES801. We are currently producing around 20,000 units annually.
Next year, we hope to introduce a 97-percent petroleum-free tire and will introduce it into the Japanese replacement tire market and try to secure business with Japanese car makers. We believe, for instance, that this tire could be adopted for fuel cell vehicles or, possibly, hybrids. Conceptually, it makes sense to introduce it into this segment.
Then do you believe these tires will catch on and contribute to your future bottom line?
Honestly, we don´t know. We would be happy if they could claim 1 percent of the market, say, by 2010. But we still don´t know if that´s possible.
Are there any additional costs in producing them?
Yes, but the basic production process is the same. The real problem is what sort of premium consumers will pay. I don´t think they´ll pay 20 percent or even 10 percent. I believe we must shoot for 5 percent. Otherwise, these tires will be hard to sell even if consumers recognize their added value.
It has been said that when Toyota introduced its first hybrid car, the Prius, the auto maker sold the car at a loss for the first four or five years.
We can´t do that. The key for us is to bring down costs to the level where we can make a profit. We are just not sure when that might be possible.