The Market for Tyres in East Africa

Competition heats up as tyre manufactuers engage in uphill battle to gain market supremacy in East Africa

W hen it comes to tyres, the African continent is one of the fastest growing markets for the global tyre industry. The rapid growth of the middle class in many African countries has pushed demand for automobiles to an all-time high – in turn creating a growing market for all kinds of tyres: passenger car tyres, off-the-road tyres, industrial tyres, agricultural tyres, truck, bus and trailer tyres as well as motorcycle and bicycle tyres.

The rising demand for tyres in Africa has led to stiff competition between tyre manufacturers from all across the world seeking to garner a major share of the market for tyres in the new and emerging African markets. Traditionally, European tyre manufactaures had had a monopoly over the African markets and many European brands were top selling tyres in many African countries.

However, in recent times, European tyre firms are beginning to loose ground to Chinese and other Asian brands in many emerging markets not only in Africa, but around the world. Chinese tyres are gaining popularity in several African markets. Many developing countries, specialy in Africa, are price-sensitive markets and prefer to import low-priced Chinese tyres rather than the expensive European and American brands. As a result, China has emerged as a leading exporter of tyres to many African countries in recent times.

Players in the tyre business worldwide are not renowned for fair trade practices and Kenya is no exception. Some years back, all tyre companies operating in the United States were summoned by the Federal Bureau of Investigation (FBI) after accusations that the multi-million dollar firms were engaged in cartel-like cost-fixing in the country.

In Kenya, a significant bulk of uncustomed products have entered the local market. Firestone, which also imports tyres from the parent company, Bridgestone Corporation of Japan, say they have been in touch with the treasury over the issue, but the practice continues.

Tyres attract a duty of 35 per cent which, according to business analysts, should place the prices of imported and locally manufactured tyres roughly at par, with only marginal price variations on some brands. But international tyre manufacturers say retail and wholesale prices of some foreign products in the market are well below the expected minimum if costs of production, transport, insurance and duty are considered, an indication that there is illegal dumping.

Apart from lack of infrastructure, most illegally imported tyres, have a quality problem emanating from storage; some are poorly stored in godowns in hot places like Dubai for months, which seriously compromises quality. Before Firestone established its manufacturing plant in Kenya nearly two decades ago, all tyres were imported. The government, eager to promote import-substitution, imposed quotas and tariffs to protect the local industry, which gave the company a virtual monopoly. However, some imports were allowed since there were vehicles in the market which could not use the company's products.

Fifteen percent of Firestone, a member of the Sameer Group of Companies, is controlled by Bridgestone Firestone Inc of the US, which, in turn, is a subsidiary of Japan's Bridgestone Corporation. Japanese company bought Firestone Tyre and Rubber Corporation of the US, which also owns much of war-ravaged Liberia's rubber plantations. Before 2005, buoyed by a weak Japanese yen, Bridgestone was the world's foremost tyre producer. But as the value of the yen against major hard currencies shot up, and dollar-based sales plummeted, it was overtaken by Michellin.

In recent times, the tyre companies in Kenya have carried their rivalry to the airwaves, each claiming superior products. While Pirelli and Michellin needed introduction since they were new in the market, a Firestone survey showed that the Michellin campaign was having a significant impact on sales and Firestone was forced to embark on their own campaign. Michellin is exclusively marketed by Kingsway Tyres who, however, declined to comment. Pirelli, which is sold locally by Nyanza Petroleum Company, has confined its marketing strategy to advertisements painted on Stage Coach buses, which, ironically, use Michellin tyres! Although the most popular Michellin adverts target matatu and small cars, Firestone claims there has been no major impact by their rivals in this area. Then there is the issue of warranty. While Firestone products boast that they "come with a written guarantee", Michellin advertisements proclaim "the name is the guarantee". But Firestone is not daunted, offering replacement for any tyre damaged due to errors arising from manufacturing, stressing the fact that its tyres are tailor-made for Kenyan roads.

Besides new tyres, there are also low-quality second-hand ones which soon wear out on the country's rough roads. The managing director of Pirelli (Europe), Valter Donati, says that most used tyres are dumped into the African market after exceeding the legal use limit in European and other developed countries. The thread of the tyres is so shallow that it makes nonsense of the cheap prices, and they also have a poor surface grip.

An increase in  tyre import duties has been requested for South Africa, owing to the large quantity of substandard tyres that are being brought into the country from China. The cheaper tyres provide unfair competition for local tyre manufacturers, who are concerned with the risk the thinner tyres pose to the safety of heavy vehicles such as taxis. The National Union of Metalworkers (Numsa) has asked Government to increase tyre import duties to stop the influx of cheap tyres.

Supporting Numsa’'s campaign, South Africa'’s top four tyre manufacturers (Bridgestone, Continental, Dunlop and Goodyear) have brought the Government'’s attention to their safety concerns for the widespread use of tyres of inferior quality. The new Toyota Quantum taxis, a larger version of the minibus taxi, are most at risk of accidents caused by the cheap tyre imports. To cut costs, taxi drivers replace their 15-inch Quantum tyres with cheap 14-inch tyres, which are thinner and cannot carry the car'’s weight.

The tyre manufacturers and Numsa say that there is a marked increase in the dumping of Chinese tyres. "From 2000 to 2010, the imports of passenger vehicle tyres increased by 100 percent from one million to two million per year, while the imports of commercial tyres grew from 200 000 to just less than 840 000," says Etienne Human, the chief executive and president of the SA Tyre Manufacturing Conference (SAMTC).

The effect is being felt by local manufacturers who are experiencing a significant decrease in demand as a result of the effects of the recession  in the car industry. Bridgestone, Continental, Dunlop and Goodyear  are currently cutting back on up to a quarter of their labour force.  China’'s tyre production far outweighs the country’'s local demand for tyres, and so tyre dumping on foreign soil has become a necessary evil.

Etienne Human said that the South African tyre manufacturing industry is losing more than Rands 1 billion per year as a result of the dramatic increase in tyre imports. He attributes this increase to sloppy checking systems by customs officials. As a result, imported tyres account for almost half of the tyres in the South African market.

He also added that in 2004 and 2005, tyre manufacturers applied for anti-dumping import duties against Chinese companies but their application was unsuccessful.  Despite the manufacturer’s’ assessment that the tyres are of inferior quality, Sharma Iqbal, a deputy director-general at the Department of Trade and Industry said that all tyre imports were standardised and approved by the SA Bureau of Standards.

So despite the best efforts of the most developed country in the African continent, the onslaught of the Chinese manufacturers continues. Chinese tyre manufacturers have, in a way, broken the myth about European technological superiority by producing high quality tyres at fraction of the cost. The European brands, used to charging high prices for their products, have finally been challenged and are now being forced to roll back their profit margins and compete with Chinese manufacturers.

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RECENT DEVELOPMENTS

In 2006, in a significant all-cash overseas deal worth about US$80 million, the board of directors of Apollo Tyres Ltd (ATL) approved the acquisition of the Durban-headquartered Dunlop Tyres International (Pty) Ltd (Dunlop South Africa).

The 100 per cent equity buyout transaction, subject to regulatory approvals in both countries, would enable the US$ 726 million ATL to secure a toehold in the fast growing Africa region and also a strong presence in the South African tyre market.

Besides the benefit of superior radial tyre technology, the acquisition would also enable the domestic tyre major to access the European market through the distribution network owned by the $200-million Dunlop South Africa.

By virtue of the equity buyout of Dunlop South Africa, ATL would get to control Dunlop Africa Marketing UK (registered in the UK), which is a 100 per cent subsidiary of Dunlop South Africa and also the holding company of Dunlop Zimbabwe (which owns the Zimbabwe facility).

Dunlop South Africa had 3,000 employees, two plants in South Africa (each 75 tonnes per day) and one plant in Zimbabwe (35 tonnes per day bias tyre facility of Dunlop Zimbabwe). At present, ATL's capacity in India is about 750 tonnes per day!

Sarkar said that ATL has no plans of making any changes to the management of Dunlop South Africa. Moreover, the existing brands of the acquired company would be continued.
Prior to this transaction, financial investors (comprising mainly private equity, individual investors and some holding by members of senior management) owned Dunlop South Africa.

Sarkar expressed confidence that all regulatory approvals would be received easily. "As far as India is concerned, we have to only get a post-facto approval from the Reserve Bank of India as the transaction is lower than $500 million. As regards the South African Competition Commission, we don't foresee any problem," he said.

Apart from Dunlop South Africa, the other three significant players in the South African market are Continental, Bridgestone and Goodyear. All the four players enjoyed nearly equal market share. 

 

 

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