China exports only 30 percent of its entire production of tires. Nevertheless, overseas earnings continue to achieve high double-digit growth, with 92 million passenger car, bus and truck tires crossing the US$3 billion mark in 2005. These figures represent an increase of more than 30 percent in volume and almost 55 percent in value. Overseas shipments in January have already reached 8 million tires worth US$297 million registering a 17 and 37 percent growth in terms of volume and value, respectively, over the same month in 2005.

Export value registered bigger growth due mainly to the fact that suppliers are shipping their products, especially bus and truck tires, at prices that are significantly higher than they were a year ago. Models for buses and trucks account for almost 65 percent of the country's exports of tires. They averaged US$64 per unit in January this year compared with US$47.50 in January 2005.

Exports are expected to continue increasing steadily this year as suppliers intensify efforts to penetrate overseas markets to reduce their dependence on domestic sales. This move was necessitated mainly by the slowdown of China's car manufacturing industry that started in 2004 and continues today, which left many makers, especially those that had expanded in anticipation of a continued boom in the sector, with large unutilized capacity.

In addition, suppliers are keen on avoiding severe price competition in the overcrowded domestic market, which is becoming even more intense as multinationals such as Michelin, Goodyear and Bridgestone strengthen their presence in both the OEM and retail segments of China.

China suppliers will continue to focus on the international aftermarket for replacement parts, which currently absorbs about 80 percent of exports.

One of the primary reasons for this strategy is that demand for tires in the aftermarket is about three times higher than in the OEM segment. Concentrating on the aftermarket for replacement parts also lessens the dependence of sales on the increase or drop in actual automobile production. Tires continue to sell in the aftermarket whether new vehicles are made or not.

Higher margins are also driving China tire suppliers to continue focusing on the aftermarket, especially in light of increasing raw material costs and competition. Tires can be sold at prices 10 percent higher in the replacement market than when they are sold on an OEM basis to carmakers.

Suppliers can also increase market recognition of their brands as tires for the aftermarket usually carry in-house brands, providing them with a stronger differentiation advantage against competitors.

Dichotomous trend

Tire makers in China are moving toward two different directions. On the one hand, multinationals, large China-owned suppliers and several mid size companies with the financial resources to invest in production system upgrades and more extensive R&D work are fast tracking the development of competitively priced, high-performance radial tires that can command higher margins. These suppliers are developing higher value models to boost exports to upscale markets such as North America and the EU, where there are stringent quality and safety standards regulating tires.

On the other hand, the rest of the supplier base continues to concentrate on the manufacture of bias tires despite the fact that the market for this product is shrinking with the increased use of radial tires in both light- and heavy-duty or off-road vehicles. Some suppliers have already expanded their selections to include large off-road bias tires for heavy trucks and industrial machinery, applications where there is currently a shortage of tires.

All information contained in China Sourcing Reports is the result of exclusive, ground-level and definitive research conducted by Global Sources' analysts. Companies featured in these reports may or may not be clients of Global Sources.