Chinese tire companies have significant advantages in terms of labor costs and intelligent manufacturing. In the short term, they have achieved rapid expansion based on the population dividend. In the medium term, they are accelerating the globalization process with the advantage of intelligent manufacturing. In the long term, they are expected to obtain brand premium based on their technological strength.
According to Futu Securities, the tire industry has the characteristics of a large market scale, high technical barriers, and strong brand attributes. The global scale is expected to exceed 1 trillion yuan in 2023. The barrier to entry is the vulcanization technology and product formulation, and the consumer goods attribute brings brand premium. Chinese tire companies have significant advantages in terms of labor costs and intelligent manufacturing. In the short term, they have achieved rapid expansion based on the population dividend. In the medium term, they are accelerating the globalization process with the advantage of intelligent manufacturing. In the long term, they are expected to obtain brand premium based on their technological strength and become global consumer giants.
The main points of the Minsheng Securities report are as follows:
Taking advantage of overseas inflation, Chinese tire companies are accelerating their overseas expansion.
The global tire industry's total output value will exceed $180 billion in 2023, with production approaching 2 billion units. There has been no technological change in the past 20 years, and a competitive pattern of 'three giants + eight groups' has formed. In recent years, Chinese tires have continuously improved their product performance, with many test parameters not inferior to or even surpassing those of leading foreign brands. With the advantage of cost performance, the global market share has increased from 3.1% in 2000 to 15.3% in 2023. Currently, Chinese tires are benefiting from overseas capacity withdrawal due to global public health incidents and the increased demand for high cost-performance products under inflation in Europe and the United States, which is accelerating their overseas expansion.
'Double reverse' constitutes the largest fluctuation in demand, and globalization can effectively cope with it.
In 2023, the replacement market will account for more than 70% of the global tire market, and it is the main source of demand. The sales volume in the replacement market comes from the inventory of automobiles, which has strong resilience in demand. In terms of regions, the European and American markets will account for 51.4% of tire sales in 2023. Among them, the replacement market will account for more than 80%, which is the main market that Chinese tire companies face. The fluctuation in demand mainly comes from the 'double reverse'. Considering that the main consideration of the European and American initiation of the 'double reverse' is 'countries or regions with a high proportion of tire imports', Futu Securities believes that the global establishment of Chinese tire factories will effectively cope with the fluctuations caused by the 'double reverse' and the decline in demand.
Seize the advantage of latecomers in the industry, and the overflow of intelligent manufacturing is global.
The advantage of the tire industry pioneers is reflected in the dilution of fixed costs due to economies of scale, as well as the externalities of brands and research and development. However, the globalization leads to the increase in transportation and management costs, which will limit the unlimited expansion of the pioneers. The advantage of latecomers in the tire industry is significant: latecomers are mostly located in developing countries, with lower labor costs; they benefit from equipment updates and iterations, and have higher automation levels in manufacturing; based on higher intelligent manufacturing capabilities, latecomers often have larger single plant scale and stronger economies of scale; due to lower labor costs and fewer labor force, the expense ratio of latecomers is lower. Minsheng Securities believes that independent leading tire companies are expected to give full play to the advantages of intelligent manufacturing, achieve higher profitability than foreign tire companies, and maintain a global leading position in per capita income, overseas factory construction quantity, and factory construction cycle acceleration.
From manufacturing to branding, independent brands are rising.
Based on the domestic market, independent brand tire companies have achieved a market share of more than half and a market penetration rate of nearly half, relying on product performance and cost-effectiveness. With the acceleration of the expansion of independent brand tire companies overseas and the globalization of factory construction, they are expected to achieve a resonance of demand and brand strength. Reviewing history, channel layout can effectively improve product reach, bring increased demand and brand awareness, and mergers and acquisitions can achieve global capacity, channel, and brand expansion. The short- to medium-term goal of independent brand tire companies is the global replication of intelligent capabilities, and the long-term goal is the improvement of brand strength. On the basis of the bullish global factory construction of leading tire companies, the rise of independent brands is ultimately achieved through independent vehicle manufacturers, channel layout, mergers and acquisitions, and other means.
Investment advice
Based on excellent product performance, China's leading tire companies fully utilize the advantages of intelligent manufacturing, realize the global replication of high-intelligence factories, effectively reduce the volatility brought by tariffs, achieve continuous improvement in global capacity and sales, and are expected to eventually realize brand strength. Optimistic about the second phase of expansion of leading tire companies overseas, higher proportion of overseas production capacity layout, and tire companies with stronger capabilities in the construction of automated factories. Recommended companies include Sailun Tire (601058.SH), Qingdao Sentury Tire (002984.SZ), Shandong Linglong Tyre (601966.SH), and Jiangsu General Science Technology (601500.SH), and cautiously recommend Triangle Tire (601163.SH), Guizhou Tyre (000589.SZ), and Prinx Chengshan (01809).
Risk reminder: fluctuations in raw material prices, lower-than-expected global tire demand, exchange rate fluctuations, slower-than-expected landing of new capacity, intensification of international trade frictions, fluctuations in freight prices, and slower-than-expected start of new projects, etc.
