SEOUL, South Korea (Dec. 19, 2008) — Hankook Tire Co. Ltd. is reducing its production volume in December and has slowed down its plans to build a factory.
Hankook's U.S. subsidiary, Hankook Tire America Corp., said the capacity cutback is because of declining demand for cars in a number of markets. It will be a minor adjustment spread across some plants by adjusting operational days but will not affect employment, a company spokesman in the U.S. said.
The company wouldn't quantify how many units would be affected nor would it disclose which facilities would be impacted. The spokesman said the production cutbacks are slated only for December and will not affect tire supply to U.S. dealers.
Even with the December cutbacks, Hankook said its global capacity will be 10 percent higher than 2007 volumes. Sales for the first three quarters of 2008 have grown 18.4 percent, 27.5 percent and 24 percent, respectively, the company said.
The South Korean parent firm has been planning a new plant, but hikes in raw materials prices and decreasing industry demand have put the company in standby mode.
“We are very careful to make a final decision,” said President and CEO Seung Hwa Suh. “We are considering one spot in Southeast Asia, but we didn't make a final decision yet.”
Hankook has five factories, including one that opened last year in Hungary. Until recently, the firm had been keeping up with industry growth, but now it has to balance short-term overcapacity concerns with long-term growth.
“We need 3 million-plus (more) tires every year in order to match global growth rates,” he said.
The new factory plans haven't been scrapped because costs related to building a factory can be lower in a down economy, and the company wants to prepare for better days ahead. “If we make this time an opportunity, perhaps we invest today to prepare for the good days in two or three years,” Suh said.
And the company still is operating at capacity, said Soo Il Lee , vice president of marketing.
Tire manufacturers in recent years have had the problem of demand outpacing supply, leading to fill rate troubles, Hankook included.
Besides the unwelcome solution of an economic downturn, Hankook has dealt with fill-rate problems by opening up more warehouses. It opened one in Aurora, Ill., in April and has expanded some of its other five distribution centers in the U.S. Chief Marketing Officer Hyun Shick Cho said fill rates stopped being a problem in June.
Cho also said a period of “major restructuring” in the industry could be coming up in the next one to two years, comparing current conditions to those of the industry's last major restructuring in the 1980s.
“This is similar,” he said.
Hankook is open to acquisition possibilities, according to Suh.
The economic downturn also could provide Hankook with opportunities to win new customers seeking lower-cost tires, he said. The company believes there is a lag in perception, especially among North American consumers, of the quality of its tires.
During a recent media event in South Korea, Hankook showed off its research center and a factory. The tours were aimed at getting across the message that the company emphasizes quality and technology.
The scenic countryside factory, situated among mountains and farm fields, is highly automated. Even the forklifts drive around on their own, stopping when they detect an object—including a person—in their path.
“Consumers in America don't know very much about Hankook. They buy our tires because the price is reasonable. They don't expect the quality of Hankook. So that is our difficulty,” Suh said.
After scoring a deal to supply tires for the Audi A6 in the Chinese market, Hankook now is getting its tires tested in Europe to supply the A6 and A3 there.
But at the same time the company isn't looking to be a premium or performance brand, just one that is successful because of a general quality tire, said Hyun Bum Cho, chief finance and strategy officer.
“We want to be the Toyota of the tire industry, not Ferrari,” he said.