Winds of war alter tire business landscape

Russia's invasion of Ukraine on Feb. 24 changed the business landscape in Russia massively—and perhaps permanently.

The invasion spurred a global outcry against Russia and triggered a mass exodus of Western businesses from the country. At the time this was written, more than 1,000 companies had declared their decision to sever ties with the Russian market voluntarily, research conducted by Yale School of Management showed.

The tire industry is no exception. Of the seven non-Russian tire companies with manufacturing operations in Russia, all have cut back sharply their business activities there, and two—Michelin and Nokian Tyres P.L.C.—have declared they are cutting ties completely.

This drop in predominantly premium tire production has created new opportunities for Russia's domestic manufacturers and opened the door for imports, primarily from China.

Nokian—which reports annual revenue from sales in Russia and Asia of around $378 million from the plant in Vsevolozhsk, Russia—was the first to react, announcing on Feb. 25 it had moved production of some of its key lines out of its plant in Russia to plants in Finland and the U.S., while securing "transport capacity from Russia with existing and new service providers."

Three days later, Michelin disclosed it had halted production at its 18-year-old factory in Davydovo and was suspending its industrial activity in Russia as well as exports to the country. Plant capacity is listed as 6,000 units a day.

On March 14, Bridgestone Corp. said it would suspend the operation of its Ulyanovsk plant in Russia's Urals and halt imports and investments. Bridgestone opened the plant in 2017 with a nameplate capacity of 2 million tires per year.

On June 28, Michelin and Nokian also rolled out plans to curtail operations in Russia.

Of the seven foreign tire makers with manufacturing in Russia, Michelin was the first to set up operations in Russia, in 1997, followed in 2004 by the opening of its tire plant in Davydovo, near Moscow.

"After temporarily suspending operation in March of 2022, we evaluated various scenarios of keeping our Russian business," Dmitry Molokanov, president of Michelin Eastern Europe, said at the time.

"Unfortunately, we have to admit that Michelin sees neither conditions nor opportunities to resume and maintain operation in the form it had before," he added, noting that the company decided to pass its Russian assets to local management. That deal is slated to be inked by year-end.

The plant made around 1 percent of Michelin's global capacity.

European sanctions have made the future operation of Nokian Tyres in Russia impossible, Andrey Pantuykhov, general director of Nokian Tyres Russia, said.

The company's plant in Vsevolzhsk, Leningrad Oblast, is rated at close to 16 million tires per year.

Nokian Tyres used to export 60 percent of its tires from Russia, primarily to Europe, since the launch of the plant in 2004.

On June 22, the company said it had to dismiss 320 employees and cut production due to a lack of exports. In addition, the Vsevolzhsk plant experienced problems with raw materials imports as Western sanctions barred deliveries from Europe.

Nokian Tyres could possibly continue operation in standalone mode, Pantuykhov said, adding that the final decision on the matter is due to be made by the company's hierarchy.

Pirelli S.p.A. also has stopped investment in the Russian market, promising to phase down production at its two Russian tire plants—in Kirov and Voronezh.

In a statement on March 18, the company said that activities of the factories in Russia would be progressively limited to those needed to guarantee the financing of salaries and social services for employees.

At the time of this writing, both plants continue operating, but there is no information pertaining to their production volumes.

On the other hand, Continental A.G. resumed operation of its Kaluga factory in early August, according to Vladislaf Shapsha, governor of the Kaluga region, in a statement on his social media channels.

The company suspended operation of the Kaluga plant in early March and stopped imports to the country. But it managed to rebuild the supply chain to relaunch the tire factory again, Shapsha said.

Continental remains silent about the future of its Russian business.

Yokohama Rubber Co. Ltd. resumed operations Aug. 11 at its plant in Lipetsk, following a halt in production since March.

The 10-year-old facility has the capacity to produce 1.6 million passenger tires a year.

Voltyre Prom, Titan International's Russian subsidiary, also continues operation.

In early March, the company said it curtailed investments in its Russian business and that Voltyre Prom operated at a low capacity utilization ratio.

No shortage of tires is expected in Russia due to some plant closures, said the Center for Prospective Technology Development (CRPT), a Russian government agency authorized to supervise the state of play on the tire market.

The available warehouse reserves are estimated at 80 million tires, while the monthly demand on the domestic market is close to 3.6 million tires, CRPT said.

"This quantity is enough to meet the demand for the next 18 months," CRPT estimated.

In the first half of 2022, Russia imported 10.9 million tires, up 22 percent from 8.5 million during the same period of the previous year, CRPT said, adding that the growth was secured primarily by Chinese companies that seek to replace Western brands.

Tire imports from China totaled 3.7 million tires, up 44.7 percent vs. the first half of 2021, CRPT said. In contrast, imports from most of the Western nations fell precipitously: South Korea dropped 54 percent (to 760,000 tires); Japan was off 54 percent (to 500,000 tires); Luxembourg, down 60 percent (to 336,000 tires); and Germany, off 42 percent (to 304,000 tires), CRPT reported.

Chinese tire brands Linglong and Triangle, and Maxxis from Taiwan, reportedly have significantly boosted supplies to the Russian market in the first half of 2022. Over the past few years, Chinese tire imports to Russia were hampered by antidumping duties imposed in 2016 in a bid to protect the domestic market.

All market players expect Chinese tire imports to surge.

Andrey Toptun, head of the analytics department at Russian think tank Avtostat, claimed that "a holy place is never empty," and the share of Western brands pulling out from Russia eventually would be taken by other market players. Toptun reminded that Continental has not yet announced its decision regarding the future of their Russian business.

"If a shortage (on the Russian tire market) is possible, it will be only short term, but prices will definitely soar due to logistics, lack of competition, and global hike in prices for components for the production of tires, rubber, other materials and energy," Toptun added.

Maxim Ryazanov, technical director of the Fresh Auto car dealership network, told a Russian government publication that owners of expensive cars would suffer from Michelin's departure from the country since the French brand occupied a significant share of the premium segment in tire production.

"Russian producers, though they are not experiencing a shortage of raw materials, will not be able to replace foreign players by 100 percent, especially in the premium segment," Ryazanov said.

Russian tire manufacturers Nizhnekamskshina (aka Kama) and JSC Cordiant, traditionally associated more with the budget segment of the market, have not shared any information about their production performance in 2022.

On March 28, Rafinat Yarullin, head of Tatneftekhiminvest, said its subsidiary Nizhnekamskshina experienced difficulties producing Kama tires due to a lack of imported raw materials.

A spokesperson for a Russian tire company said Russian tire factories in March through May saw a slump in production owing to a lack of imported natural rubber and some other raw materials due to logistics issues. However, the logistics crisis already has been overcome, and production across the board has reached the pre-crisis level.

The source added that ramping up production could be a lucrative option against the background of the departure of foreign brands, but the Russian tire companies are not ready to pump large investments in the import-replacement projects on their own without substantial support from the state in the form of subsidies.

"It is hard to imagine owners of BMW, Toyota, Volkswagen and other similar brands buying Russian or Chinese tires," said Tatyana Arabadzhi, director of the Russian government's direct investment agency, adding that some hopes in this field could be associated with parallel imports—a system green-lit by the Russian authorities, under which goods could be delivered into the country without permission from the brand's owner.

"However, it is yet to be seen how effective this system is going to be," she added.

In late May, Russian energy and chemicals company P.J.S.C. Tatneft disclosed it was divesting its Nizhnekamskshina tire-manufacturing operations as part of the strategy to narrow its focus on "key projects."

Tatneft, one of Europe's larger suppliers of synthetic rubber, said it had agreed to sell the tire business to J.S.C. Tatneftekhiminvest-Holding, an entity independent of Tatneft Group.

Nizhnekamskshina operates two tire plants in Nizhnekamsk in central Russia, one primarily focused on car and light truck tires and the other on truck, agricultural and industrial tires.

The company was ranked 38th among global tire makers, according to Rubber News calculations, based on fiscal 2021 sales of $824 million.