Auto and tyre industries and natural rubber

Dr N.Yogaratnam

The world rubber economy depends heavily on the automotive and tyre industries as the main outlet for natural rubber(NR) is in association with the automotive industry with tyre sector consuming in the region of 65 to 70 percent of NR produced in the world.

Tyre sales, is the sum of original equipment tyre sale which is linked to the number of vehicles produced and replacement tyre sales which is linked to the number of vehicles on the road.

The International Rubber Study Group’s (IRSG) report on the sale of passenger car tyres (number of units) indicates that the change in sales had been -3.9 percent growth in 2009, but forecasted to be 10.9 percent growth in 2010 and 5.8 percent growth in 2011.

In the case of light commercial vehicle tyres, the change in growth had been -3.5 percent in 2009 but forecasted growth in 2010 is 11.2 percent and 8.1 percent in 2011. The change in the medium heavy commercial vehicle tyres growth had been -7.6 percent in 2009 and forecasted sale is 15.4 percent growth in 2010 and 8.5 percent growth in 2011.

Auto Industry

The auto industry is a highly concentrated one. About ten global automakers account for over 77 percent of the production worldwide. Among them, Toyota Motors leads with a 13.3 percent market share, while its domestic rivals including Nissan and its alliance with Renault account for 8.4 percent of the auto market, Honda Motor 5.6 percent and Suzuki 3.8 percent.

Among the Detroit automakers, General Motors holds 11.9 percent of the auto market, Ford 7.8 percent and Chrysler-Fiat 6.4 percent of the auto industry.

The recent economic crisis has provided an impetus to a massive structural change in the auto industry, setting the stage for growth over the next decade.

Given the high barriers to entry and need for scale economies (in operations, supply chain and marketing), the global auto industry landscape is expected to be ruled by global automakers and suppliers based in the six major auto markets of China, India, Japan, Korea, Western Europe and the US.

To remain competitive, automakers will need to design vehicles that will meet the requirements of consumers in both mature and emerging markets.

Automakers will focus on more user-friendly and low-cost vehicles that are also the most advanced technologically.

The automakers will continue to shift their production facilities from high-cost regions such as North America and the European Union to lower-cost regions such as China, India and South America.

For example, Greater China and South America was projected to represent more than 50 percent of growth in global light vehicle production in the auto industry from 2008 to 2015.

Cost and Demand

There are two underlying factors behind this location shift in the auto industry. The first is the cost factor. The cost of labour in emerging auto markets continues to be a fraction of that in the developed world. The second is the demand factor.

Many low cost regions, including the emerging auto markets, have high potential for growth. Thus, the shift in auto industry production facilities will lead to a localization of the manufacturing base that will bring down transportation costs.

The emergence of trading blocs is also giving this process a push in the auto market. It is likely that over time there will be fewer car imports from outside a trade zone.

Further, automakers have started to reduce the number of technological platforms with a greater diversity of models produced from each platform in order to remain cost competitive in the auto industry.

For example, Honda, with its flexible common platform, has developed three dimensionally distinct versions of the Accord, allowing for designs where 60 percent of the components are common.

Ford aims to build 680,000 vehicles per core global platform within five years, up from current levels of 345,000 units.

After emerging from its bankruptcy, General Motors has started focusing solely on four core brands - Chevrolet, Cadillac, Buick and GMC.

‘Green’ Alternatives

Higher fuel prices and concerns over global warming have pooled attention on the auto industry that either rely less on traditional fossil fuels or use renewable sources of less expensive energy.

Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrids will attract consumers in the wealthier countries while flex-fuels such as ethanol and natural gas will be highly sought-after in the emerging auto markets where the local climate or resource base favors their usage by automakers over petroleum.

Consequently, there will be a variety of power train technologies in the auto industry by the next decade. It is likely that “green” cars will represent up to a third of total global sales in developed auto markets and up to 20 percent in urban areas of emerging auto markets by 2020. Some of the “green” cars have already generated a huge response in the auto industry.

These include the Ford Focus, GM Volt, Daimler Smart, Nissan Leaf and Toyota Prius.

The role of governments must not be overlooked. Governments in all major countries have become active auto industry players. Their investments through emergency loans and incentive packages, such as “Cash for Clunkers” in the US, are a good example of this.

Moreover, governments’ energy and environmental policies will be highly responsible in molding the auto industry in the coming years.

Although automakers continue to focus on shifting their production facilities to new regions driven by cost and demand factors, developing the supplier networks remains one of the greatest challenges they face in the auto industry.

Financing

Existing suppliers to automakers often lack the financial background to expand capacity in new markets. On the other hand, auto market suppliers are sensitive to technology transfers to local third parties, which may result in new and lower-cost competitors.

The financial condition of the majority of auto market suppliers continues to deteriorate, resulting from historically weak demand and higher dependence on automakers.

According to the Original Equipment Suppliers Association (OESA), 13 major U.S. direct auto market suppliers and two indirect auto industry suppliers have filed for Chapter 11 bankruptcy or have had their assets foreclosed on, while many others in the auto industry have simply liquidated in the first half of 2009.

They include prominent components auto market suppliers such as Visteon and Lear, who cater to General Motors and Ford. According to OESA, 12 percent of the auto industry suppliers do not have sufficient working capital to support a 10 percent to 25 percent expansion in production.

Thus, despite the government’s sizable investment in the automakers, it is likely that there will be auto market suppliers who are unable to restart operations as automaker production resumes due to working capital shortfalls. Higher dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts.

Pricing pressure from automakers is constricting auto market suppliers’ margins.

On the other hand, production cuts by automakers driven by frequent market adjustments are negatively affecting their operations. Some of the auto industry suppliers who have a high reliance on a few automakers such as General Motors, Ford, Chrysler and Volkswagen include American Axle and Manufacturing, ArvinMeritor, Goodyear Tyre and Rubber, Magna International, Superior Industries, Tenneco and TRW Automotive.

Small Cars

The shift in auto market consumer preferences towards hi-tech, fuel-efficient, environment-friendly vehicles, such as small cars/hybrids/EVs, is another issue. Auto market suppliers are expected to quickly adapt to the new technologies by investing in research and development, putting heavy capital burdens on them.

India is emerging as a large market for automobiles as its fuel-efficient, compact environment-friendly small cars are increasingly in demand in the Asian, European and Latin American markets. Economic and the rising fuel prices are forcing people in these countries to go for small vehicles and thinking rubber for a moment, that will mean more smaller tyre sizes.

The ‘scrappage incentive’ offered by the European countries for replacing nine-year old cars with small, fuel-efficient vehicles has helped the Indian cars to enlarge its market share in these countries.

Though this incentive ended in December 2009, but the trend in preferring compact vehicles will continue.

The automakers also face significant challenges in transforming the existing power train technologies into the new versions as far as marketability is concerned.

As the number of technology applications increases, automakers and suppliers will need to be selective. Their criteria for choosing what to include and what not to, will depend entirely on what the customers are willing to pay for .

Tyre Industry

There are numerous Rubber products where natural rubber is the major component or play a significant role in the product performance, such as in automotive tyres.

In fact, Tyres is the main product with highest consumption of natural rubber (Table 1).

Projection of rubber demand for various end-products have been adapted from a study of LMC International Ltd, Oxford, England (2005) in conjunction with Rubber Eco-Project Study of the International Rubber Study Group (IRSG).

The demand of the tyre industry for rubber can be broken down into different types of tyres, namely :

* Light vehicles (cars and SUVs)

Medium/ heavy vehicles

* Off the Road vehicles (OTR)

* Two wheelers (Motorcycle and Scooters)

* Retread tyres

* Tubes and related products

Tyre demand for car and SUVs is primarily determined by per capita incomes, with demand highest in countries with the highest incomes. Over time, as incomes grow, so does the demand for personal vehicles.

Demand consists of two components, namely original equipment (OE) and replacement tyres (REPL). OE tyres are those fixed on the original vehicles coming out from the assembly line of the manufacturer.

Based on the assumption that there is little growth in demand for run- flat tyres, the demand projection up to year 2035 has been summarized as shown in Table 2 and Table 3.

OE light vehicle tyre demand reached 650 million units by 2035 or double the numbers in 2005. Replacement tyre demand should reach 1,540 million units by 2035 . For medium / heavy vehicle tyres, developing economy regions account for a larger share of the global market than is the case for light vehicles, and sales are expected to advance faster in developing regions than in more developed regions, in part due to growth and improvements of road infrastructure. This is also leading to a rise in the proportion of radial tyre sales.

Carbon Trading

As more than 65 percent of NR goes into tyre industry, the tyre makers can utilize linkages with rubber growers to offset their CO2 emission trough CERs. Moreover, the tyre industry has a crucial role in GHG emission reduction, besides seeking monetary benefits in terms of carbon debits to offset their emissions.

The way forward for tyre manufacturers in Annex 1 countries is to move agenda for funding rubber cultivation under CDM. Here, IRRDB, IRSG and ANRPC should jointly facilitate the process by bringing the tyre industry and producers to jointly draft Project Design Document (PDD) following guidelines laid down by the CDM.

This partnership should benefit both parties, emitters and the sequesters of GHG, as both parties are committed to honour their undertaking, for eg.: the tyre manufacturer will pay US $ 18,150 for development of 3.63 hectares of rubber in countries like Kampuchea, Indonesia, Myanmar, Laos and even in countries like Papua New Guinea and earn 605 CERs/ ha to be used to meet their respective QUELRCs (Quantity Emission Limitation and Reduction Commitments)

Asia Pacific

Although, the NR industry is based upon minimal environmental disturbances, it cannot be forgotten that the primary end use is in personal transportation, much of which is extremely harmful in terms of global increases in CO2 emissions.

Nevertheless, it is a consolation that the CO2 emitted by tyre is not a problem for the NR element of the tyres, as this will be recycled by the rubber trees that produced it in the same way that it is possible to grow biomass as a source of fuel.

The regional economy of Asia Pacific, would certainly benefit tremendously from an expansion of its natural rubber-based products sector, as the region has been the stronghold of natural rubber production of the world and will be even stronger in the foreseeable future with expected more production to come from Indonesia, Vietnam, Thailand, Philippines, Cambodia, Myanmar and Laos. However, with the presently extraordinary high price of raw natural rubber in the world market, there would be less incentive to convert raw rubber and latex into finished rubber products as they might not end up gaining either the right margin or the expected added value that could be accounted for in normal situation.

There are several rubber-based products with strong potential for their manufacturing industry to be flourishing in the region, such as medical latex gloves and motorcycle tyres, plus simple cost-effective general rubber goods useful to the rural agrarian people. Medical rubber glove as an export product has a bright future as the demand is projected to triple in the next 20 years.

Motorcycle tyres can be manufactured with natural rubber as the dominant raw material in medium scale industry which are relatively labour intensive and the product has splendid captive demand in Asia. Demand in the Asia pacific should almost triple within the next 30 years.

Sri Lanka

Sri Lankan rubber products manufacturing sector has also made impressive performance, despite many lingering challenges.

The extraordinary high both Global and domestic NR market had been the biggest challenge to this sector , but now with formidable support for this sector from the government, as spelt out in the budget 2011 of the present Government, the out look appears to be very positive.