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Frost & Sullivan Product Report: China's tire market

Monday, June 21, 2010 - 00:00

The fact that China vehicle sales passed the 10 million mark in 2009, and that sales are expected to reach an approximate 15 million by the end of 2010, is no longer a surprise. As this growth continues, numbers are expected to reach the 20 million mark by 2013.

Frost & Sullivan research shows that the total VIO (vehicles in operation) will reach U.S. levels by 2020 and pass the U.S. VIO level to gain stability around 2026, reaching close to 300 million vehicles in operation.

What does this mean? This indicates that, in terms of unit shipments, China will be a bigger market than the U.S. in the next 20 years. Considering it took over 100 years for the U.S. automotive industry and the tire industry to develop to today’s levels, China’s speed of growth is just incredible.

With the China auto industry growing at such a fast rate, the replacement tires industry will also grow at the same speed as the auto industry – and tire dealers and outlets are expected to appear at extreme rates.

The U.S. tire industry has developed since the early 1900s, starting with branch houses, dealer-distributor, and slowly evolving into today’s model. This has allowed for the development of the dealer channel to best cater the consumer groups and maintain a loyal consumer base. In China’s case, the industry has started ‘development’ since the early 90s. This fast acceleration has forced the tire distribution channel to quickly adopt the models that have been successful in the U.S. – evidence shows that this trend is not only applicable to tires, but the entire Chinese aftermarket industry.

On this note, the historical incidents that happened during the development of the U.S. tire industry will most likely happen in China. This includes price wars, dealer wars, participation of retail and mass merchants, and finally the dreaded introduction of private label tires.

Private label tires offer increased margins for both the distributor and the manufacturer. Looking back at U.S. history, private labeling is clearly the key reason behind lower average prices and tire dealer price wars. Considering that China is a very price-sensitive market, this trend is most likely to happen. The big questions are when? And Who?

Research indicates that when considering China’s conditions today, it is most likely to happen in the retail channel first (as in the early 30s in the U.S. with Sears and Goodyear). The introduction of tire sales through the retail channels was introduced into the Chinese market in 2009 by Sam’s Club (Walmart Group) with Bridgestone tires. It won’t be long before other retailers join this practice and private label products appear in the market.

When we look at the U.S. tire industry during the mid 40s through the late 70s, price wars and dealer wars happened after the introduction of private label tires. This led to mass consolidation and M&A among manufacturers and tire dealers. This consolidation created today’s ‘chain’ concept.

It is clear and expected that China will follow this trend very soon. For a U.S. tire dealer looking into new opportunities, China looks to be a very attractive market to enter in the near future.

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