Manufacturers Take On the Russian Market

If the 8th Moscow Tires & Rubber show is anything to go by, the Russian tyre market looks set to continue its development as a growth market. While the show was marked by growing interest from exhibitors and visitors, the market itself has produced some generally optimistic data and has seen perceptions of the manufacturers’ market approaches improve. All this suggests that the Russian market will continue to develop into a very interesting tyre market, with a strong growth potential.

Last year the passenger car sales, the driving force of the market, grew 10 per cent and, it is estimated, will double again by 2010, due to unprecedented demand for cars. All this is reason enough to turn a blind eye to the changing market conditions of manufacturers and other market players.

The Amtel Group has the greatest potential to deal with coming challenges successfully. Six factories belong to the closed joint stock (not listed) company, which is aiming to make its initial public offering by the end of 2005. Three of these are tyre factories in Russia, another tyre factory is in the Ukraine. In addition there are two chemical facilities in Russia. Currently Amtel is in the process of heavily investing into these facilities. For example a new $50 million production line started production just weeks ago at the company’s Kirov plant. At the same time Amtel is building a green-field premium tyre factory next to an existing factory in Voronezh. This will cost another $60 million. At the end of March Amtel will finally and completely take over Dutch manufacturer Vredestein, as has been previously reported. “We are going for premium tyres”, explains Dr Sudhir Gupta who, since the 1990s has built Amtel into what it is today.

In an interview with Tyres & Accessories Mr Gupta asserts that Amtel is sure to benefit from the Vredestein takeover by using the Dutch producer as a profit centre. This way Vredestein will continue to manufacture high performance, ultra high performance as well as 4×4 tyres. Consequently, all 13 to 16 inch tyres will be produced in Russia in the future. It is very likely that this will include Vredestein brand passenger car tyres as well as Maloya tyres, Vredestein’s second brand. Both brands will remain on the market, according to the Amtel president. Furthermore, Dr Sudhir Gupta, who was born in India but now lives with his family in Singapore, wants to continue Vredestein’s activities in Thailand and Indonesia and has even thought about focussing on this part of the world more closely. Having said that, he doesn’t have strong feeling about the Chinese market. Vredestein is strong for its “very good research and development” as well as its comparably low costs of production in Enschede. However, this doesn’t necessarily mean that there will be a transfer of technology, i.e. machinery, from Holland to the Russian factories, Mr Gupta claims. Nevertheless the Russian tyre manufacturer is keen to benefit from the Dutch know-how and is going to implement it into its own production facilities.

The Amtel group has other far reaching plans. Before the company embarks on another take-over, if ever, forthcoming developments will have to be judged. “We want to look at the synergies first” that will come along with the take-over of Vredestein, says Dr Gupta. The company’s plan of action for its initial public offering (IPO) is pretty much in place. When this step is undertaken in November this year the company expects to reach a market capitalisation of about 750 million dollars. According to Dr Gupta, this new equity will be “used for plans in the future for Russia.”

The president has no intention of disclosing what these might look like, but as a matter of fact Amtel has invested about 200 million dollars in the modernisation and expansion of its production facilities. According to the business plan major investments will continue up until 2012. Amtel is particularly aiming to prove that it can make the B segment of the Russian tyre market its own segment, no matter how much the company is focussed on Dutch premium tyres. The new production line in Kirov for example, will mainly produce 13 to 16 inch Amtel Planet and Amtel NordMaster branded products passenger car tyres. These will be sold on the domestic market in order to squeeze out the growing imports of Western B segment tyres. “We don’t want to go out of that market,” acknowledges Sudhir Gupta. The same accounts for premium tyres which will be produced in the new factory in Voronezh.

Next year, when the new factory is running and the Vredestein take-over has been accomplished, the Amtel group will be able to produce about 25 million tyres of which there will be 7.5 premium tyres (Vredestein and Voronezh) as well as 9.8 million B segment passenger car and light truck tyres. Of the 20 million tyres produced in the factories in Russia and Ukraine 14.5 million will be passenger car tyres. Within the PC tyre segment 6 million winter tyres will be produced, three quarters of which will have spikes. Apart from passenger car tyres, Amtel also produces light truck, truck and agricultural tyres. The most recent developments all point to an emphasis on the B market segment. And it is in exactly this area that Amtel has been increasing its capacity. Between 2004 and 2006 the company is planning to double the number of B segment passenger car tyres it produces.

According to market research, this will provide five times higher margins than in the production and distribution of low-budget tyres. The reason is that the production costs for tyres from these two market segment are almost alike but the possible retail prices differ greatly.

Analysts also believe that this segment strategy is right. In 2003 Amtel didn’t produce many B segment tyres, in the near future it will make almost 10 million. This means the turnover could increase up to $618 million in 2006. But at the same time, the profitability of the company will grow stronger than the turnover itself. An EBIT margin of 5.3 per cent is expected in 2004, by 2006 this figure could have been increased up to 13.1 per cent, if the analysts from Troika Dialog are not mistaken.

The Sibur Group is also looking for a place in the Russian tyre market that it can call its own. Like Amtel, Sibur operates four tyre factories in Russia. Right now its seems to be a little bit too early to judge in which direction the company is going to develop. According to Vadim Gurinov, general director of Sibur-Russian Tires, the company is going to be the Russian manufacturer of truck and agricultural tyres. “Our main focus is on professional tyres,” he says in an interview with Tyres & Accessories. “This market will be dominated by Sibur for at least another five years,” he said pointing to the company’s traditional strengths. Take agricultural tyres – Sibur manufactures three quarters of the 1.7 million annual Russian demand. In addition to this Sibur is still market leader with a share of 25 per cent based on market turnover (2003) 46 per cent of all Russia-made tyres are produced in Sibur-Russian Tires’ four factories.

Although Sibur wants to build up even stronger competence as a producer of professional tyres the company has no intentions of neglecting the very important passenger car tyre market. According to Mr Gurinov this market is almost exclusively a B and C segment market for Sibur. “We try to develop the middle and the low market segment,” he asserts. For Sibur-Russian Tires, a company that nearly had to file for bankruptcy after financial quarrels with the parent company in 2002, this premium market is almost unreachable, Vadim Gurinov admits. In this market segment there is “extremely high competition”, “really huge investments” are necessary, and all this in an environment where “the consumer is not ready to accept the production of Russian tyres” even if they are supported by intensive marketing measures.

At the moment it makes more sense to pitch at the enormous demand for unbranded Russian products. Three quarters of the Russian market are C segment tyres. On the other hand the prognoses of Western manufacturers and analysts is not good, most describing it as being in free fall.

It is expected that budget tyres from the C segment will only cover 40 per cent of the Russian market in two or three years, although the actual number of sold tyres will remain relatively stable because the market itself is growing. This will not be the end of the C segment tyres’ demise in terms of market share. Investing in such an area is not very good for the profitability of any company because low budget tyres (13 – 15 inches) have a sell-in price of about $20 in Russia. Getting a return on this is very tricky when you consider that production costs are just 10 per cent less.

However, the general director believes that it is important to be present in this market segment, too. In light of competitors’ decisions to invest in the middle market segment, Mr Gurinov’s explanations of Sibur’s strategy certainly make sense. For example the general director is also convinced that Sibur’s share in this market segment can even be increased over the years.

Between 2004 and 2008 the company is going to invest about £350 million in the “partial renovation of equipment.” By this it means capacity increases in professional and agricultural tyres. The manufacturer hopes to increase its annual turnover from now 670 million to more than a billion dollars in 2008. Part of this strong turnover growth will be because of increased exports. At the moment 60 to 70 million dollars are made on foreign markets, namely markets of the former Soviet Union and in Eastern Europe. This means an export share of 10 to 15 per cent. Again commercial and agricultural products form the centrepiece of Sibur’s foreign trade activities Mr Gurinov explains. “[The] western market is really interesting for us and we are trying to enter it,” he adds.

In addition to that Sibur-Russian Tires can significantly benefit from the joint venture between its factory in Omsk (Omskshina) and Matador. Founded 10 years ago. The 50:50 venture currently produces about 1.75 million Matador brand passenger and light truck tyres for the Russian market. Right now, joint venture capacity is being increased up to 3 million, and then up to 5 million tyres a year by 2008. Also 16 and 17 inch tyres will be produced in Siberian Omsk in the near future. According to a public survey undertaken by a Russian business magazine the Russian-Slovakian venture is among the 20 most profitable companies in the country.

Other projects form part of Vadim Gurinov’s calculations. “Right now we are having contacts with Western manufacturers on other joint ventures,” he adds without giving any more details on his potential partners or the content of the negotiations. The most important part of any joint venture is the technological development of Sibur’s facilities. This is why the general director doesn’t take off-take agreements into consideration: “We are not very interested in this.”

By far the biggest single tyre factory in Russia with an annual capacity of 11.7 million units is operated by Nizhnekamskshina. According to analysts, this factory is likely to have a long future in the Russian market. Tatneft has majority shares in Nizhnekamskshina, which belongs to Tatneft, a Russian mineral oil complex. It is expected that Tatneft is going to increase its share in the tyre manufacturer from 75 per cent to 90 per cent. The tyre manufacturer will exchange debts with its parent company for new equity. In other words: Tatneft is getting more Nizhnekamskshina shares in order to write off loans it has given to the tyre manufacturer.

Last year Nizhnekamskshina made optimal use of its capacities in producing 11.4 million passenger car, truck, light truck as well as agricultural tyres, explains Rinat Biktimerov. The executive director of Kama Trading House, the distribution affiliate of the tyre manufacturer, has also recognised the urgent need to get away from producing only low budget C segment tyres. Up until the beginning of 2004 only Kama brand tyres were shipped to Russian and foreign dealers. Recently exports grown in importance for Nizhnekamskshina. Mr Biktimerov stresses that last year about 25 per cent of the output was shipped to dealers abroad, namely to the CIS states. Some exports are even going to the UK where Nizhnekamskshina closely cooperates with importer London International Traders Ltd (LIT) a company that sells Kama passenger car tyres in Great Britain.

Since 2004 Nizhnekamskshina has operated a fully automated production line for high quality passenger car tyres. An “Italian partner” has delivered the technology for this production line, as Rinat Biktimerov points out. This Italian partner of course is Pirelli. Nizhnekamskshina has invested about $50 million in the Pirelli line and can manufacture about 2 million tyres with it. At the same time as launching the new production line, a new tyre brand was introduced. The “Kama Euro” is produced in sizes from 13 to 16 inches. “Performance and quality are not lower than foreign products,” the executive director told T&A. Although exports are becoming more and more important for Nizhnekamskshina, the new B segment tyre brand Kama Euro cannot be exported to Western Europe. This is all written into the contract between Pirelli and the Russian manufacturer and expires in two years time. By the same token Pirelli tyres are not produced in Nizhnekamsk although there are negotiations with the Italian partner about an off-take agreement.

Because Kama Trading House and the manufacturer both believe in the competitiveness of the new passenger car tyre brand, there are even discussions about creating yet another new tyre brand which could be sold on the markets of Western Europe. Although, for the time being this is just an idea and not a specific plan. In light of a healthy co-operation between the two companies, discussions about taking this co-operation into other segments are also underway. Right now there are “some negotiations with other foreign partners in truck tyres.”

Whatever plan comes to fruition, the question of capacity remains. According to analysts, it is both possible and necessary to end the production of bias-ply tyres. In recent years Nizhnekamskshina produced about 1.2 million of these tyres for passenger cars, trucks and agriculture.

Currently the annual capacity of bias-ply tyres is still 700,000 pieces a year and there is a corresponding demand for tyres from the CIS states, Mr Biktimerov points out. Should the existing but outdated bias-ply technology be replaced with new radial technology, annual capacity could grow by far more than it would diminish through the dismantling of the old machinery. During the coming five years Nizhnekamskshina has planned to increase its production capacity from its current level of 11.7 to 17 million units. However, an Amtel press release cast doubt on the amount that is currently outputted. This suggests it is only about 9 million tyres, which would mean it is only running at 77 per cent capacity and Nizhnekamskshina still has room to manoeuvre.

There is certainly no doubt about the global intentions of a tyre giant like Goodyear Tire & Rubber. The Russian Market is also of interest to the company. Although Henry Braun, the general director of Goodyear’s local distribution organisation, doesn’t want to disclose sales figures for the Russian market, according to a market research done by Nokian Tyres, Goodyear’s annual imports should be about 1 million units. In addition to these imports the American tyre company produces another 300,000 Medeo brand passenger car tyres under an off-take agreement with Sibur’s tyre factory in Yaroslavl’. Therefore Goodyear should have a three to four per cent share of the 40 unit million strong market.

Medeo is a volume brand, which is made for the low budget segment of the market. Only 13 and 14 inch Medeo tyres are produced and they are “extremely well accepted by the Russian market,” says Henry Braun.

A global tyre corporation like Goodyear, can afford to expect more from the Russian market, particularly in light of strong market growth rates. “We certainly recognise the importance of the Russian market, “ Mr Braun acknowledges, and this is why the “good working relationship” with the Sibur group should be continued. Nevertheless, questions about a local production base seem to be evident. The general director of LLC Goodyear Russia does not want to comment on Goodyear’s future plans to have a factory in Russia except to say that “it is being considered.” The fact that Goodyear is choosing to pause before pouring millions in a Russian production facility is understandable. Just recently, one of the company’s competitors, Continental, took a blow when it had to write off a 30 million euro joint venture with the Moscow Tyre Plant.

Goodyear imports several corporate brands to Russia. Apart from its leading Goodyear brand the company ships Dunlop, Fulda and Sava tyres into Russia; Debica and Falken tyres are not imported because there is “no need to bring everything on the market,” points out marketing manager Inna Selivanova. Apart from passenger car tyres, truck, OTR and agricultural tyres are also sold on the Russian market. The company’s recent truck and agricultural tyre developments also help those responsible at Goodyear look forward to increasing sales figures.

The market is big enough for all the different segments – whether budget or premium, the American tyre maker believes. However, Henry Braun thinks that the Russian tyre market of the future will be even “more competitive”. Goodyear has one big advantage over the local manufacturers. “We are a global company with a global brand name.” The locals still need to make huge investments in order to compete in this respect.

Pirelli is also at work in Russia, and has had its own distribution organisation (Pirelli Tyre Russia) for a about a year. Before then, only Russian importers were able to sell Pirelli passenger car tyres on the domestic market. But now the Italian manufacturer is looking for a new approach, according to Aimone Di Savoia. Although the director general of Pirelli Tyre Russia doesn’t want to disclose any exact figures, it is expected that Pirelli’s exports to Russia were between 300,000 and 400,000 pieces a year (2002), according to Nokian’s market research. This figure could have increased by up to half a million if we try to take the “very interesting growth rates”, Mr Di Savoia has noticed since the foundation of Pirelli Tyre Russia. According to the director general, Pirelli’s exports to Russia have grown faster than the market’s eight to 10 per cent general growth rate. However, sales figures are not the most important thing about Pirelli’s Russian business: “Right now we are getting the quality of tyres, not on the quantity,” Aimone Di Savoia told T&A while at Moscow’s Tires & Rubber exhibition in Moscow. Pirelli wasn’t exhibiting at the show, something that reflects that it is still going through a period of market observation.

Pirelli is going to take on the premium tyre market segment in Russia and Aimone Di Savoia doesn’t want to rule out the possibility that it could double its annual exports to Russia in the next two to four years. Truck tyres, another very important Pirelli segment, are not generally exported to Russia apart.

Matador has made its mark on the Russian tyre market by entering into a joint venture with a local manufacturer. 10 years ago the Slovakian manufacturer entered into a joint venture with Omsk-based Omskshina, a subsidiary of the Sibur group. This joint venture, which celebrates its tenth anniversary in May this year, is among the most profitable companies in the country, according to a survey conducted by a Siberian magazine (see above). Commercial director responsible for the tyre division, Dalibor Kalina, is certain about the importance of exhibiting in Moscow and about showing the company’s latest machinery products in addition to tyre releases. “It is important to show that we are here and that we have plans for the future,” Mr Kalina says. The recent developments on the Russian tyre market have been much stronger than in any other Western tyre market. That’s why a company like Matador, with its ten-year standing and all its knowledge about the market, is optimistic about the future. Matador produces and sells 1.7 million passenger car and light truck tyres in Russia – almost twice as much as tyre giant Goodyear. The company aims to increase this right up to 3 million soon.

If the Russian tyre market is getting more interesting for tyre manufacturers, this also applies to other players in the market. For example the Polish raw material supplier Konimpex began to sell natural rubber for tyre production in Russia only a year ago. The 5.2 million capacity, Amtel owned, Rosava tyre factory in Belaya Tserkov has just recently signed up a delivery contract with Konimpex. Based on this first step, those responsible at the company’s headquarters in Konin believe that negotiations with other Russian manufacturers could have a similar outcome to those at Rosava, says Micha_ Czajor. The project manager won’t disclose the names of the potential customers although he is very confident that Konimpex will sign more contracts with Russian tyre manufacturers during the course of this year.

The Polish supplier is not aiming at giant turnover leaps through the new business in Russia, explained Michal Czajor in an interview with T&A. “It is about delivering on a regular basis,” and that’s what counts – lasting business relationships. Just recently Konimpex, a privately owned company with about 150 employees, began running an office in Moscow.

Apart from supplying to Russia, Konimpex already has well established business relations with Russian companies as a buyer of raw materials. The company has been buying carbon black and synthetic rubber in Russia and Ukraine (about 40,000 tonnes in 2004) for some time now. Micha_ Czajor has to admit that it is very difficult to sell these raw materials to Russian tyre manufacturers because most of them -Amtel asside – are owned by large chemical complexes or corporations (Tatneft owns Nizhnekamskshina; Gazprom owns Sibur). And these produce raw materials themselves. Last year the Polish supplier made a worldwide turnover of 80 million euros. In 2005 this figure could grow up to 100 million euros.

In addition machinery manufacturers like Berstoff are quite happy with the recent developments of the Russian tyre industry. When, according to Dieter Brunner, “everything was dead” in Russia in 1999. Now, “business has much improved since 2000.” Berstorff GmbH has a long history on the market and has even done business with tsarist Russia, but in 2004 the company achieved “the best result for 15 years” in Russia, says the managing director of Berstorff’s Moscow office. Nowadays all Russian tyre manufacturers are Berstorff’s customers – or at least this is what the Hanover based company hopes. Many Russian factories were equipped in Soviet times, a fact that is now the driving force behind modernisation. Also technological changes like the end of the bias-ply production in Russia, expected in the not too distant future, will create further demand. Russia is becoming more and more important for Berstorff. Currently the country accounts for 20 per cent of the company’s turnover. However, a new construction of a machinery production facility for the Russian market was not possible for operational reasons.

A proverbial “wind of change” is blowing across the Russian tyre industry also affects exhibition organisers, Maxima. This year’s 8th Tires & Rubber exhibition, which was the first show of this kind to be held in the renowned Expocentr in Moscow, attracted many international visitors and exhibitors. Even the higher fees, required to cover the cost of exhibiting at the new venue, could not slow down the growth of Russia’s most important tyre show. Alla Shevchenko, who has been project manager responsible for the Tires & Rubber show for several years, said: “This year’s exhibition really has improved and we are absolutely satisfied with the show.” This year there were about 10,000 special visitors from all over the world attending the four days of the show in order to build up new business contacts, maintain old relations, or even get information about the latest products and developments of the industry.

This year’s show has just closed its doors the organisers are already planning the Tires & Rubber exhibition for 2006, Alla Shevchenko explains. The show is most likely to take place in March in Moscow’s Expocentr, with other tyre and rubber related exhibitions running simultaneously.