A New Market is Born
When you have a tyre market that grows by ten per cent each year, as in the case of Russia, an impact on the retreading market is inevitable. Although retreads still don’t have the same status as they do in Western Europe, the eleven companies that are currently doing business in this market are looking forward to a bright future. The growing new tyre market has led to the appearance of a number of different retread companies, including Bandag, Kraiburg and Ellerbrock. Smaller companies like Elgitread from India and ITG from Italy have also shown interest in the Russian market.
According to Kraiburg area sales manager, Robert Renner, there are 11 retreaders in Russia. Speaking to Tyres & Accessories Mr Renner. went on to explain that three of them are based in the Moscow area, another four are near St Petersburg, with the remaining four situated in the Russian countryside. All eleven are pre-cure retreaders. Three are Bandag franchisees.
Because data on the Russian retreading market is scarce to say the least, for the time being we will have rely on projections. According to Mr Renner, the retreaders in the Moscow area produce about 600 to 1,000 truck tyre retreads every month. Assuming that this number is an average monthly figure, all eleven Russian retreaders produce between 25,000 and 40,000 retreaded truck tyres per year – a reasonably small number compared with other European markets. In the UK, for example, about 1.1 million retreaded truck tyres were sold in 2004, in Germany it was 1.4 million. Comparing annual production figures with annual market sales doesn’t leave room for many conclusions, except that the markets are extremely different in terms of size.
This contrast says a lot in itself, confirming that the market is underdeveloped. The Baltic states of Estonia, Latvia and Lithuania have 16 retreaders between them, of these one even offers hot-cure retreading. Mr Renner, who also represents Kraiburg’s interests in the Baltic states as well as the CIS says: “Retreading in Russia is still very weak,” adding that there are reasons why the market is only growing slowly. The first and most important problem for professional retreaders is the acquisition of suitable casings. Russian market insiders all agree that even ‘high quality’ truck tyres made by local producers are (still) not retreadable because the casing structure is just too weak. Bandag for example has undertaken some tests with Russian-made truck tyres. It found that out of 100 new truck tyres it buffed and retreaded only 10 per cent passed endurance tests.
So, as long as there are not many casings available within the Russian market, they will have to be imported instead. This obviously results in additional costs for the retreader. Including import duties and transportation, an average truck tyre casing that would cost about 50 euros would become a 90-euro luxury commodity. And that’s just for the casing alone. The additional costs of the retreading process itself make it difficult for Russian retreaders to compete with cheap, domestically produced, new tyres.
Another reason why the local market is unlikely to grow quickly in the short term is because of imported truck tyre retreads that are originating from Eastern and Western Europe. Robert Renner has even come across cheap counterfeits of Kraiburg retreads, items which he describes as nothing more than “cheap treads.”
Because of the same problems found in the new tyre industry, it is more difficult to install a production facility for retreads in Russian than in Western Europe.
This is just as true for the retreader as the material supplier. The most pertinent problem is obtaining the necessary state or municipal authorisations, something that can easily lead to a bureaucratic nightmare. By just importing treads, Russian manufacturers or retreaded truck tyre dealers can be much more flexible, the area sales manager explains.
According to Mr Renner, Russia has “enormous potential” for the future because local fleets are increasingly buying Western trucks. And when the number of these trucks grow, so does the need, if not the necessity, for fleets to take proper tyre management steps. Nevertheless, fleets have been “highly inflexible” when it comes to purchasing tyres, something Mr Renner can only explain as being caused by “personal reasons.” Personal reasons is really a polite way of saying that the motives of those who buy and sell the tyres are supported by financial donations – in other words bribes. What makes this more difficult to manage is the fact that these relationships are well established.
However, when Mr Renner talks about an “enormous potential”, the market expert refers to the doubling of Kraiburg’s annual sales in Russia that has taken place during the last three years. Looking forward, Kraiburg is hoping to triple its sales figures in Russia during the next two years. At the moment business in Russian is not all about sales figures, although these are of course important.
In Mr Renner’s eyes, the acquisition of new customers in Russia is more important and will help the company get a strong foothold on this growing market. In Russia “many companies are interested in retreading,” something that was demonstrated at February’s Tires & Rubber exhibition in Moscow. To what extent Kraiburg will be willing and able to help new customers during their start-up period depends on their potential to produce quality retreads.
The American based Bandag Corporation also believes that the Russian market will grow strongly. Bandag has nine franchisees throughout all nine states of the former Soviet Union, with another company due to sign a contract soon. Of these, three workshops are in Russia itself, although there isn’t one in Moscow itself yet. Another one is based in Ukraine, with a second one on its way. Franchisees can also be found in Kazakhstan and Uzbekistan with three more in the Baltic states. The list shows why the industry leader is already in a very strong position in the region. However, there is still a lot of work to do the Russian market with regard to the company’s Eurofleet services etc before Bandag can claim it has made a breakthrough. Russia is a long way away from implementing regulations like ECE 109.
“You have to educate the market, but education takes time,” explains Luc Slembrouck. Bandag’s business development manager for the CIS states and other export markets points out that Russia is still a “product-based country” where services like fleet and tyre management are difficult to establish.
Nevertheless, Bandag has already managed to sign a contract with one of Russia’s biggest fleets, a 700 truck and trailer strong Sovtransavto company. In order to offer extensive fleet management to Russian customers, Bandag knows it will have to further co-operate with local tyre dealers. In spite of this kind of teamwork, it is still extremely difficult to guarantee a breakdown service in remote places far away from the main residential and industrial areas. Geographically Russia is the largest country in the world and that is why there are still many blank spots on Bandag’s coverage map.
In addition, many truck tyre dealers and even Bandag franchisees are not as far on as the global market would like to see them. For example, the St. Petersburg Bandag dealer has only recently acquired its first service truck, event though operating such a truck is an absolute necessity in order to maintain a truck tyre dealing or retreading business in Western Europe. Although Bandag first made contact with Russian businesses about 15 years ago, according to Luc Slembrouck, “Bandag is still learning about the country as well.” In light of this it is difficult to put a number on how many Bandag franchisees would satisfy the American company. It is obvious that the current total of nine is not enough for the ambitious company.
One way the company could increase its presence in Russia is through the construction of a production facility, something that is highly probable in “the foreseeable future” the business development manager asserts.
Although Russia is “one of the biggest truck markets of the world,” the market level is – to say the best – “old Russian-style,” explains Ellerbrock sales manager Christian Asmuth. The fact that the truck tyre business is still not regarded as a “circular system” is one of the biggest problems when it comes to establishing a functioning retreading industry in Russia.
Currently truck tyres are seen as no more than consumer goods, although they should be regarded as a reusable commodity. This is why retreaded truck tyres are often seen as “a product alternative to a new tyre,” says Christian Asmuth in an interview with T&A. The experience from other developing markets shows, explains Ellerbrock’s sales manager, that the market will arrive at a turning point sooner or later. “That’s when you have to be present on the market,” Mr Asmuth continues, citing Poland as a good example. Currently about 220,000 to 250,000 truck tyres are retreaded every year in Poland.
Ellerbrock has been doing business on the Russian market for eight years, delivering treads and retreading materials to three customers. Two of them have shops in the Moscow area, which is situated outside the best-known cities.
All well-established Russian retreaders have a “comparably high Western standard,” not least by virtue of financial and technological help from partners like Ellerbrock, Bandag or Kraiburg.
Ellerbrock, for example, provides “a full package” for its new business partners , which includes financing, training for production managers, delivery of (used) machinery and consultation on marketing and distribution. In offering this packaged, Ellerbrock usually invests a large sum before its sees anything in return. As a result the company insists on a five year contract in exchange for everything it offers.
One of the biggest problems apart from the availability of casings, high transportation costs and customs duty for Western imports, is the quality of Russian truck tyres. Russian-made truck tyres “usually look very nice,” sales manager Christian Asmuth says. However, this is about as far as he goes when it comes to praising Russian truck tyre. Russian casings are usually not of a sufficient quality for the task.
In addition to that, more than half of all the Russian truck tyres produced are 20 inch products. Even if these tyres were retreadable, there are few tread manufacturers that produce this size. In Western Europe 20 inch truck tyres are “a dieing size,” explains the sales manager. The truth is these products’ market share is even decreasing in Russia itself. Currently 60 to 65 per cent of all retreaded Russian truck sizes are either 385/65 R 22.5 or 315/80 R 22.5 – standard truck tyre sizes.
Apart from the well established market players like Kraiburg, Bandag or Ellerbrock, smaller companies are also keeping their eyes on the Russian market and its big growth potential. One such company is Elgitread (India) Ltd. This company, which had an annual turnover of roughly $4.5 million in the 2003/2004 financial year, has been delivering treads to a retreader in the St Petersburg area for some months now. Each month Elgitread ships a 20 foot container of its products to its customer in the former Russian capital of Newa.
Apart from this customer, Elgitread does business with a retreader in Slovakia which will soon become a 100 per cent Elgitread customer, explains Sushil Sarcar. Elgitread’s manager for international marketing says “there’s a lot of potential” in Russia adding that “people are looking for a change.”
Convincing dealers as well as end consumers that they get “products at a cheaper rate but the same quality” is essential when it comes to establishing a functioning retreading industry. In this respect, Elgitread wants to be prepared for this ‘day of reckoning’ that will surely come in the foreseeable future.
As a consequence, the Indian tread producer is currently looking for a local Russian distributor that has worldwide stock capabilities available. This way the company would gain a foothold on the market, Mr Sarcar believes. In the medium term the company continues to aim to “make ourselves known here and establish ourselves here [in Russia].” Before entering into any supply contracts it is important to create a certain brand awareness within the Russian market. This is why Elgitread has exhibited at Tires & Rubber show in Moscow on two occasions now. The Indian company is confident that it will soon supply three to four customers in Russia, plus another four to five in the coming years.
On a global scale, Elgitread (India) Ltd already has a strong network of franchisees and production facilities and clearly hopes to find its way in the Russian market as well. In India for example there are about 400 Elgitread franchisees plus an additional 125 elsewhere in the world. Elgitread has a particularly strong presence in Africa, the Middle East in Brazil.
In addition to this dealer network Elgitread operates seven production facilities, three in India, and one each in Brazil, Sri Lanka, Mauritius and Kenya. On top of this strong retreading base, Elgitread is proud of its close relationships with Indian tyre manufacturers including Michelin, Apollo Tyres and JK. Michelin dealers recommend Elgitread retreads to their customers because the French tyre giant doesn’t operate its own factory retreading business in the country, says Sushil Sarcar. However, Elgitread only produces the tread and does not offer special services like fleet or tyre management through its franchisees.
Italian company, ITG/Paltread is also “really interested in the Russian market.” The company, which belongs to CM Manzoni sells 14 million euros worth of truck tyres retreading material each year. Although there are currently few customers in Russia, Fabio Cortesi, ITG’s chairman, believes in the big potential of the Russian market too. However, the strong euro exchange rate means it is difficult to offer competitive products on the Russian market at the moment.
On the other hand “other producers trust in this market,” Mr Cortesi told T&A and so “in a short time business should grow” for ITG as well. Currently ITG is pre-empting this change by thinking about building stock capacities in Russia in order to react more flexibly to the growing demand. “We are looking at different options,” explains Mr Manzoni, grandson of company founder CM Manzoni. In his words, just “a few per cent” of the 2,500 tonnes (hot and pre-cure; truck and passenger car tyres) of retreading material the company produces is currently sold on the Russian market. When one considers the changes taking place on the Russian tyre market it will be just a matter of time until local truck tyres are good enough for retreading, Fabio Cortesi says. That’s when ITG wants to ’kick-off’’ on the Russian market. At the moment
there are “few Russian customers.”
Casing dealers like the Dutch Kargo group are also benefiting from the growing Russian retreading industry. Each year Kargro buys and sells about 1.2 million truck tyre casings as well as 2 million passenger casings. Some of these tyres will be sorted out and processed in Kargro’s own tyre recycling facility called Rumal (Rubber Maalindustrie Limburg).
The Kargro group supplies customers all over the world, and has been doing so for several years in Russia. The local retreading market has grown very quickly with some very modern companies, asserts director Ko van der Heijden. There was a lot of potential in Russia although the market has to be developed first of all. The Kargro group supplies “ten to twelve,” customers in Russia that were very loyal to the Dutch casing supplier, says the director of the Kargro group. This is why the Dutch company, that also operates its own retreading facilities, believes in good business opportunities on the future Russian market.