Page 1 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

R E S E A R C H

Compiled by Shaw Information Services trading as Tire Industry Research© 2016 Shaw Information Services Ltd

For subscription enquiriesDavid@TireindustryResearch.com+44 208 647 1185

Global Tire Intelligence reportDateline: 10 June 2016

ContentsWhat’s different about China 2Focus in China is different from the international brands 2

About this publication 2

Section 1: Retail & Marketing 3Bridgestone acquires French retail chain, Speedy 3Canadian drivers lack knowledge of tires 3Online retailer falls to loss on late Spring 3

Section 2: Sustainability 3Bio-diversity falls in Yunnan rubber plantation 3

Section 3: Investments and closures 4Gajah Tunggal opens proving Ground 4TVS Sri Chakra looks to expand capacity 4UK race tire company seeking to build factory 4Kumho opens factory in United States 4Pirelli building USD200m factory in Mexico 4JK Tyre buys three tire units from Birla 4

Section 5: Legislation and government 5US delays ADD dates for China-made TBR 5EU offers incentives to buy electric vehicles 5India launches probe into Chinese TBR tires 6Indonesian authorities accuse 6 of cartel 6Indian tire dealers see no reason for tariffs 6

Top Tire makers 2015 7Top Tire makers 2015 7

Section 6: New business models 8ACEA publishes strategy paper on connectivity 8

Section 7: Upstream and raw materials 8Prices of SBR fall as NR prices plunge 8Omsk raises prices for carbon black 8Monthly NR report - prices fall as El Niño ends 8

Section 8: Trade and statistics 9Global tire markets mixed in March – Pirelli 9Global tire markets mixed in April – Michelin 9EU CV registrations: +12.1% in Q1 9ETRMA reports on Q1 in tire industry 9

Section 9: Company information 10Michelin outlines 4-point strategy 10Michelin signs deal with French workers 10Goodyear reports record Q1 profits on lower sales 10ETRMA launches TyreAWARE campaign 10

Tire Industry under ‘Green’ spotlight 11Our analysis 11

Truck and Bus Tires From China - ITC 12

Strategy analysis: Michelin 14The newsletter contains information about the global tire industry. The information is provided in good faith, but it is not advice, and should not be treated as such. Without prejudice to the generality of the foregoing paragraphs, we do not represent, warrant, undertake or guarantee that the information in the newsletter is correct, accurate, complete or non-misleading.We will not be liable to you in respect of any special, indi-rect or consequential loss or damage.

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the West to be excessively concerned about the price and availability of natural rubber. Tire makers in the West are concerned about price volatility of natural rubber and this is driving certain aspects of long-term policy. This is not the right place to discuss NR strategy – see sustainability report.

Rather than spending time and effort on upstream materials, the senior management is more focussed on how to sell more tires with high add-ed-value. Increasingly they are seeking to gain control of the informa-tion consumers are able to access ahead of a buying decision.

Much of this now lies in the online domain, so tire makes are increas-ingly making acquisitions of online portals; information providers and other non-traditional businesses.

When a consumer seeks to buy a tire, the tire makers need to know what is important to the consumer. Is it only price, or convenience, or safety or something else. The purpose of buying into an online retailer is therefore not to sell tires, but to acquire data about how individuals make their buying decisions.

By better understanding the click-paths taken ahead of multiple buying decisions – and also decisions not to buy – the marketing team can better understand what drives the buying decisions.

Many in China believe it is largely about price, but the fact that Michelin – which regularly charges the highest prices – has strong sales shows that price is not the only factor. Many think that the purchasing decision is based on brand and price, but the information generated from mil-lions of website visits and thousands of individual purchase decisions adds refinement to that understanding. When that is combined with location, age profiling; knowledge bout the vehicle type, the marketing teams gain deep insight into how best to maximise their profits.

And from that understanding, tire makers can modify the messages they send to the consumer; can adapt their web-shops and most critically, can change their product offering to suit the immediate needs of customers.

Based on this analysis, we have taken 25 or so stories from around the world selected for their relevance to these strategic issues. Observant readers will note that there is much less emphasis on upstream suppli-ers than is commonly seen in China.

Furthermore, we have published for the first time anywhere in the world, the top-25 tire makers around the world.

Focus in China is different from the interna-tional brands

One of the most important consequences of the cultural and linguistic divide between China and the rest of the world is that the concerns and focus points in the two regions are very different.

In China there is a big focus on upstream materials and technology and less focus on marketing, distribution and global brand strategies.

This was the situation In the West until about 10-15 years ago. Around the year 2000, most of the international tire majors discovered that focussing on upstream processes and materials had a number of detri-mental consequences.

1. Products were created and developed according to the abilities of the engineers, rather than the demands of the market

2. Tires were sold according to their technical characteristics, rather than the emotional appeal to customers

3. Because many engineers are conservative and see problems rather then opportunities, the technical focus tended to be on problems and difficulties rather than opportunities and possibilities

4. A focus on upstream processes tended to lead to an inward-looking culture rather than seeking opportunities and synergies from cooperation with other specialisms.

5. M&A activity was focussed only on tire manufacture; not on other related business segments.

Different manufacturers have different levels of progress in moving away from the technical focus to a marketing focus. Goodyear and Pirelli are much more focussed on marketing Bridgestone is closing the gap while Conti has a balance. Michelin retains its strong technical focus, but is seeking to develop new business models ready for the next 20 years.

Today we see that the leading international brands (Michelin, Continental, Pirelli and others) are looking to the disruptive technologies emerging in the automotive sector – advanced driver-assist; Autonomous driving; telematics and so on to develop new business models that depend on data rather than the manufacture and sale of black, round products.

A second major difference between the major international brands and the leading Chinese companies is the value of the brand and the result-ing concern for sustainable development.

We believe sustainability and brand value will become increasingly linked as time goes forward.

About this publication

What’s different about ChinaAnother significant difference between China and the rest of the world is attitudes toward trade barriers.

In China, there is huge focus on the actual US tariffs against car tires made in China and the potential tariffs against TBR tires.

In the west, by contrast, these issues have had relatively little coverage and minimal debate.

The discussion within the premium tire makers is more about the different standards applied in different countries around the world and the amount of cost and effort required to meet these different standards within rela-tively small markets.

A second aspect of this discussion is the concern among these tire makes that the inspection teams in some countries include engineers from competing tire factories. Michelin had a policy of arranging meters such as pressure and temperature to read the incorrect value. The operating manual would indicate the value that delivered the correct setting, even though a casual observer would see the incorrect value.

A third difference is that Chinese policy makers appear to tire makers in

This document has been prepared in response to demands from the global tire community for insight into the global tire industry – and especially Europe.

Our company tracks the tire industry around the world. We publish a weekly report that gives Western executives deep insight into current developments in China’s tire industry.

Part of that research involves tracking the China-based publications that report on the global tire industry. We noticed that Chinese reporting of Western developments is woefully inadequate.

During conversations with many Chinese people, we identified a strong need in China for a source of information on the global tire industry that lies outside of the official channels.

Furthermore, in conversations with industry analysts, we identified a need for a short-form document that explains and analyses latest devel-opments in the global tire industry.

About the author. This report is compiled by David Shaw. Mr Shaw publishes widely on LinkedIn about the tire industry. He has a 30-year track record reporting on the global tire industry at the highest levels. He publishes market research reports; offers a weekly news service and manages conferences globally.

For more information see http://TireIndustryResearch.com

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Online retailer falls to loss on late SpringThe importance of the Winter tire segment in Europe was underlined in May when Europe’s biggest online tire retailer Delticom published its first quarter results.Most years European drivers begin replacing their Winter tires with Sum-mer tires in early- to mid-March. This year the replacement was delayed due to persistently cold weather during March. As a result, the company’s sales of Summer tires declined sharply. This led to a 5% decline in sales revenues and also pushed the company to a after-tax loss.

Item Q1 2016 % Change Q1 2015

Revenues 105,814 100.0 -5.0 111,339

Other operating income 3506 3.3 -16.9 4218

Total operating income 109,320 103.3 -5.4 115,557

Cost of goods sold -81,206 -79.7 -6.5 -86,814

Gross Profit 28,114 26.6 -2.2 28,744

Personnel expenses -2326 -2.2 5.9 -2196

Other operating expenses -26,229 -24.8 1.7 -25,787

EBITDA -442 -0.4 -158.1 761

Delticom is Europe´s leading online retailer for tyres and car parts and accessories. Founded in 1999, the Hanover-based company has more than 300 online shops and websites in 45 countries, among others ReifenDirekt in Germany, Austria and Switzerland. The Delticom group also includes the online shops of Tirendo. Delticom offers a wide range of products for its private and business customers: more than 25,000 models from over 100 tyre brands for cars, motorcycles, commercial vehicles and buses, but also complete wheels.Delticom delivers tires in two business days to any address the customer chooses. Alternatively, Delticom delivers the tyres to one of more than 42,000 service partners (9,500 in Germany alone) for professional fitting directly on to the customer’s vehicle at a reasonable price.http://www.delti.com/Investor_Relations/pressemitteilung_IR114_en.html

Bridgestone acquires French retail chain, SpeedyBridgestone EMEA (Europe, Middle East and Africa) has announces plans to buy 100% of Speedy France, a leading car service retail company and one of the most important tyre networks in France. The deal is subject to approval by the regulatory authorities.Speedy is a so-called ‘Fast-Fit’ chain in France. These chains offer services related to exhausts, tires and other components for cars. Consumers are increasingly turning to these chains as trusted partners for tire service and fitment at discount prices.The deal is partly to sell tires, but more particularly to gain control of the messages given out by the sales teams at Speedy outlets. In the past, a salesman might compare a Chinese tire with a B-B-3 rating against a premium brand with the same rating and guide the consumer to the cheaper product. Bridgestone now has an opportunity to change that sales message to one focussed on safety and performance to help the buyer towards a decision to buy a product made by the Bridgestone group.http://www.bridgestone.eu/corporate/press-releases/2016/05/bridgestone-to-acquire-speedy/

Canadian drivers lack knowledge of tiresAccording to a survey conducted for the Tire and Rubber Association of Canada (TRAC), 88% of motorists feel drivers have a moral obligation to protect the environment by ensuring their cars are as fuel-efficient as possible.Canadian drivers also know that making sure their tires are properly inflated (66%) and carpooling when possible (64%) are two ways to help achieve that.However, the survey also found that three-quarters (76%) of drivers are not familiar with low rolling resistance tires and the fuel saving benefits they offer.When told of the potential fuel savings they could see if their vehicle was equipped with low rolling resistance tires, 69% of those surveyed said they might buy them even though the cost is slightly higher than conventional tires.Educating people about the steps they can take to reduce the environ-mental impact of their vehicles is one of the goals of Be Tire Smart Week, which took place across Canada from May 16 to 22.http://www.autoserviceworld.com/drivers-lack-knowledge-make-green-tire-choices-survey/

http://blog.betiresmart.ca/hubfs/Get_Fuel_Fit_Guide/BTS_Get-Fuel-Fit-Guide_EN.pdf

Section 1: Retail & Marketing Section 2: Sustainability

Bio-diversity falls in Yunnan rubber plantationA team of scientists in Japan have found that rubber plantations can be bad for the environment. In a paper in Science Daily, a team of scientists from Okinawa Institute of Science and Technology say that rubber plantations are likely to have profound impacts on biodiversity due to the disruption of the natural landscape.The researchers found a sharp decline in the overall biodiversity of the ants in the rubber plantation after a forest in Xishuangbanna, China was converted into a rubber plantation.While the diversity of ants in a small area may not be worth too much lost sleep, it points to a wider concern among civil society and researchers.As forests in the greater Mekong area are cut down and replaced with rubber plantations, the overall quality of the environment is degraded.The scientists assert, “Rubber plantations are a rapidly spreading agroeco-system in Southeast Asia.”The researchers found a striking decrease in ant biodiversity at the rubber plantation in not only species richness -- the number of species -- but also in the ants’ functional and phylogenetic diversity. In fact, functional diversity declined more than expected.https://www.sciencedaily.com/releases/2016/05/160517083313.htm

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Section 3: Investments; additions and closures

Gajah Tunggal opens proving Ground

Gajah Tunggal, the Indonesian tire maker closely aligned with GiTi, has opened a tire proving ground in Indonesia.The test facility has been under construction since 2013 close to Kar-awang, West Java (see link to map, below).The total land area measures 65 hectares. Construction work was carried out in two stages. The first stage focused on the development of ISO Noise, Vehicle Dynamic testing, Wet Braking & Handling and Longitudinal hydroplaning.

http://www.gt-tires.com/indonesia/eventdetail.asp?language=2&heade-rid=241 (Indonesian language)https://www.google.co.uk/maps/place/Karawang+Regency,+West-+Java,+Indonesia/@-6.3672082,107.243206,1580m/data-=!3m1!1e3!4m5!3m4!1s0x2e69775e79e70e01:0x301576d14feb9e0!8m2!3d-6.3227303!4d107.3375791

TVS Sri Chakra looks to expand capacityIndian two-wheeler tire specialist TVS Sri Chakra is looking to increase capacity. The company reported strong profits in the 12 months to March 2016. Some of this increased cash flow is to be used to add capacity for two-wheeler tires in India where the market is growing by 7% - 8% annually.This growth is partly driven by government subsidies to rural farmers. A company spokesman said TVS is planning to increase the monthly

capacity by 10% to 2.5m unit/month from 2.3m in the current financial year (April 2016-March 2017) and confirmed the expansion of plants in Uttarakhand and Madurai. The investment is likely to be around Rs 1600m (USD 23.8m)This expansion will mostly relate to two and three-wheeler range while the company is also eyeing an extension of its product range into off-road tyres.

http://www.indiainfoline.com/article/news-top-story/tvs-srichakra-plans-rs-160-crore-capex-116051300330_1.html

UK race tire company seeking to build factoryUK-based race tire supplier DMACK is seeking to build a tire factory in the UK. Currently the company sources tires from the Shandong Yongtai Chemical Group in China.A local newspaper quoted company owner Dick Cormack as saying: “The financial package is in place. It’s down to how we structure the deal and make a decision as to where we bring the project, Carlisle or elsewhere. The company is being advised by Black Donuts. Long term, the plan is for Black Donuts to build six tyre factories – after Carlisle the next three would be in Iran, Mexico and Algeria – owned by investors but manufacturing DMACK tyres under a licensing agreement.http://www.in-cumbria.com/DMACKs-500-job-tyre-factory-could-be-built-in-southern-England-not-Carlisle-506caf83-690c-493b-b99f-06847eb1d446-ds

Kumho opens factory in United StatesKumho Tire has opened a new tire production facility in Macon, Georgia. This is Kumho’s first in the United States.Construction began in May 2008, but was suspended due to the fallout from the global financial crisis before being resumed in 2014 and com-pleted earlier this year. Built with a total budget of $450 million, the plant stands on an area of 5,704,872 square feet and has a gross floor area of 861,112.8 square feet. It boasts an annual production capacity of four million tires, which Kumho plans to raise incrementally to ten million.The new facility, Kumho’s third overseas production base after the ones in China and Vietnam, will mainly manufacture 17-inch tires or larger tires for passenger cars and ultra-high performance (UHP) tires, 80% of which are expected to be sold as original equipment (OE) tires to global automakers in North America including Hyundai, Kia and Chrysler.http://www.kumhousa.com/news/index/285

Pirelli building USD200m factory in MexicoPirelli is investing USD200 million to build a new car tire factory in SIlao, Mexico. The new factory will be adjacent to the existing car tire plant in Silao. The existing plant was opened n 2012.The new plant is scheduled to begin in 2017. It will use the group’s most advanced technologies and processes. The Silao operation has always

focussed on the Premium segment, with production centred on High Per-formance and Ultra High Performance tires for cars and SUVs, for the local and all NAFTA area markets.Pirelli’s annual capacity in Silao at the end of 2015 was around 3 million tires. This will increase to five million units according to the planned investment. With the new factory, it will increase further, to 7.5 million tires by the end of 2018.http://www.pirelli.com/corporate/en/press/2016/04/20/press-release-16/

JK Tyre buys three tire units from BirlaIndian tire maker JK Tyre & Industries has completed on its acquisition of Cavendish Industries (CIL), taking over the assets of three tire businesses previously owned by another Indian tire maker, Birla Tyres. The Cavendish plants located at Laksar (Haridwar) manufacture a range of truck and bus radials, tubes, two- and three-wheeler tyres and flaps. With the acquisition, JK Tyre gets additional capacity of truck and bus radials, a high-growth segment in which it is already the market leader. Importantly, it gives the tyre maker entry into the fast- growing two- and three-wheeler tyre market. The acquisition brings JK’s manufacturing footprint up to 12 tire plants with 9 located in India and three in Mexico. These factories have a com-bined annual production capacity of 34.7m tyres, most of which is located in India. The Indian factories can make over 20 million tyres per annum. JK has also completed the second phase expansion of its modern car and truck radial plant at Chennai with a total investment of Rs 26,000m (USD388m). The plant can make 120,000 TBRs and 450,000 PCRs per month. It has a design capability to expand up to 2, TBR and 10m PCR annually.http://www.autocarpro.in/news-national/jk-tyre-expands-capacity-acqui-sition-kesoram-industries-plants-11180

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Section 5: Legislation and government

US delays ADD dates for China-made TBRThe United States DOC has delayed by 50 days its preliminary determina-tion on anti-dumping duties on tires made in China, under investigation no. A-570-040. This delays the announcement of preliminary determinations to August 26 from July 7. The announcement was made on 26 May and published in the Federal Register of 2 JuneEarlier the US Department of Commerce delayed the linked investigation into countervailing duties to June 27 from April 25.The reason for the latest delay was a request by the USW made on 20 May. The USW said it needed more time to analyse responses from the two selected respondents

Anti-dumping (ADD) report

Countervailing duty (CVD) report

Date of application submitted 29 Jan 2016 29 Jan 2016

Department of Commerce official filing date

18 Feb 2016 18 Feb 2016

Commission preliminary arbitration 14 Mar 2016 14 Mar 2016

Department of Commerce prelimi-nary arbitration

07 Jul 26, Aug 2016

25 April 27 June 2016

Department of Commerce Final arbitration

20 Sep 9 Nov 2016

07 Jul 8 Sept 2016

Commission final arbitration 04 Nov 24 Dec 2016

22 Aug 17 Oct 2016

Tax Order Published 14 Nov 2016 3 Jan 2017

29 Aug 24 Oct 2016

https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-13044.pdf

EU offers incentives to buy electric vehiclesMany EU countries offer incentives for drivers to buy electric vehicles. ACEA has issued a guide to these incentives. We summarise them here.

AUSTRIA Electric vehicles are exempt from the fuel consumption tax and from the monthly vehicle tax.BELGIUM In the Flemish Region, electric and plug-in hybrid (emitting no more than 50g CO2/km) vehicles are exempt from registration tax. BULGARIA Electric vehicle are exempt from the annual circulation tax.CROATIA NoneCYPRUS None

CZECH REPUBLIC Electric, hybrid and other alternative fuel vehicles are exempt from the road tax (applies to business purposes only).DENMARK Electric cars and vans are exempt from registration tax.ESTONIA NoneFINLAND Pure electric vehicles always pay the minimum rate of the CO2 based registration tax.FRANCE Regions have the option to provide an exemption from the regis-tration tax (either total or 50%) for alternative fuel vehicles. GERMANY Electric vehicles are exempt from the annual circulation tax for a period of ten years from the date of their first registration.GREECE Electric and hybrid vehicles are exempt from the registration tax, the luxury tax and the luxury living tax.HUNGARY Electric vehicles are exempt from registration tax, annual circu-lation tax and company car tax.IRELAND Until December 2016, electric vehicles benefit from VRT (vehicle registration tax) relief up to a maximum of €5,000. For plug-in hybrids, the maximum relief is €2,500.ITALY In many regions, electric vehicles are exempt from the annual circu-lation tax (ownership tax) for five years from first registration.LATVIA Electric vehicles are exempt from the registration tax and pay the lowest amount (€10) for the company car tax.LITHUANIA NoneLUXEMBOURG Electric vehicles pay the minimum rate (€30) of the annual circulation tax.MALTA NoneNETHERLANDS Electric vehicles are exempt from the registration tax BPM. Vehicles emitting maximum 50g CO2/km are exempt from the annual circulation tax.POLAND NonePORTUGAL Electric vehicles are exempt from the registration tax and from the annual circulation tax. Hybrid vehicles pay 25% of the registration tax.ROMANIA Electric and hybrid vehicles are exempt from the registration tax. Electric vehicle are exempt from the annual circulation tax.SLOVAKIA Electric vehicles are exempt from the annual circulation tax. Hybrid vehicles benefit from a 50% reduction of the annual circulation tax.SLOVENIA NoneSPAIN Main city councils are reducing the annual circulation tax (owner-ship tax) for electric and fuel efficient vehicles by 75%.SWEDEN A premium (Supermiljöbilspremie) is granted for the purchase of a new electric or hybrid electric vehicles.UNITED KINGDOM Electric vehicles (with CO2 emissions below 100g/km) are exempt from the annual circulation tax, while other alternative fuel cars receive a £10 discount on the paid rates.http://www.acea.be/uploads/publications/Electric_vehicles_over-view_2016.pdf

India launches probe into Chinese TBR tiresIndia’s Commerce and Industry announced on May 3, 2016, that it has commenced an investigation into alleged dumping of TBR tires originating in China. The official title is, “Radial tyres with or without tubes and or flap of rubber including tubeless tyres having nominal rim diameter code above 16 used in buses and lorries trucks originating in or exported from China PR”The investigation was triggered by a complaint from India’s Automotive Tyre Manufacturers’ AssociationInvestigated product: new inflatable rubber radial tires (New / Unused Product categories: 40112010,40131020,40129049Dumping investigation period: July 1, 2014 to December 30 2015Injury investigation period: January 1, 2012 to December 30 2015The investigation follows from intensive lobbying by India’s tire makers. The Indian Tire Makers’ Association (ATMA) produced a White Paper that outlined the difficulties faced by Indian tire makers. http://commerce.nic.in/traderemedies/pop_win.asp?id=342Indian White Paper: https://www.dropbox.com/s/yhuklh0dj44jz-la/2016-02-02_ESSENTIAL-Tyre Import white paper(Final)-1.pdf?dl=0

Indonesian authorities accuse 6 of cartelIndonesia’s Business Competition Supervisory Commission (KPPU) has said six tire companies have been operating a cartel to fix prices. The six are: PT Bridgestone Tire Indonesia, PT Sumi Rubber Indonesia, PT Gajah Tunggal (GJTL), PT Goodyear Indonesia (GDYR), PT Elang Perdana Tyre Industry, and PT Industri Karet Deli.The investigation has been ongoing since May 2014.Documents before the Commission included minutes from a meeting in which the six participants agreed not to engage in a price war and to exchange data on production, export, sales and use of raw materials.The six companies have been fined the maximum of Rp25000m (USD1.87m).http://economy.okezone.com/read/2016/04/25/320/1371842/kppu-sanksi-6-perusahaan-ban-dari-brigestone-hingga-goodyear (Indonesian language)

Indian tire dealers see no reason for tariffsThe All India Tyre Dealers Federation (AITDF) has said imports of truck tires from China dropped by 29.25% in March 2016 as against the peak December 2015. This is in contrast to the complaints made by ATMA, the Automotive Tyre Manufacturers’ Association. AITDF also said passenger car/SUVs tyre imports plummeted by 52.83% in March 2016 over the latest previous peak of December 2015. The fed-eration claimed that the import of PCR tyres from China has come down from 74 containers in January 2016 to 50 containers in March 2016. A container carries about 1,500 tyres on average.http://www.financialexpress.com/article/economy/dealers-call-tyre-ma-jors-bluff-say-imports-down-sharply/239214/99/print/

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Top Tire makers 2015 Company Tire sales 2015 Percentage of corporate Corporate sales 2015

Bridgestone $26,262m 83.50% $31,452m

Michelin $23,160m 100% $23,160m

Goodyear $16,443m 100% $16,443m

Continental Co $11,349m 26.50% $42,826m

Pirelli $6893m 100% $6893m

Sumitomo $6050m 86.30% $7010m

Hankook $5466m 100% $5466m

Yokohama $4155m 79.50% $5227m

Cheng Shin Tyres $3545m 100% $3544m

Giti $3054m 96.50% $3165m

Cooper $2970m 100% $2970m

Toyo $2700m 79.80% $3383m

Kumho $2547m 99% $2585m

Zhongce $2498m 0.965 $2588m

MRF $2253m 100% $2253m

Triangle $2250m 100% $2249m

Apollo Tyres $1764m 100% $1764m

Sailun Jinyu $1505m 100% $1505m

Nokian $1486m 100% $1485m

Nexen $1431m 0.916 $1562m

Linglong $1313m 100% $1313m

Xingyuan $1267m 100% $1267.4m

Titan $1115m 80% $1394m

JK TYRE $1022m 100% $1022.4m

AEOLUS $976m 100% $976.4m

Top Tire makers 2015We have looked at the annual reports of the top tire makers and sought to estimate annual turnover from those reports.

We’ll have more analysis in coming issues, but this is the most important listing - the biggest tire makers in the world.

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Section 6: New business models

ACEA publishes strategy paper on connectivityMany Western tire makers are seeking to understand how their business model might change in response to the disruptive technologies being developed in the vehicle sector.This goes well beyond Industry 4.0 or any other type of industrial manu-facturing development. It looks to a time perhaps a decade away when all vehicles are connected to each other and so can implement emergency systems if it appears that a collision is likely. The connected vehicle is one of the steps on the road to full autonomous driving.ACEA, the federation of car makers in Europe has issued a position paper on connected vehicles. The group says in the document, “Connected and automated driving will revolutionise individual mobility within the space of just a few years. It will offer new potential for safe, efficient, comfortable and environmentally-friendly transport but equally create new areas of business with new players that will impact existing automotive business models.”It adds, “The vehicle of tomorrow is connected and digital. Mobility is taking on a new dimension – through communication between vehicles, between vehicle and infrastructure, and between vehicle occupants and their environment – but also with occupants accessing their own data and media, for example, through online services. In-car internet access opens up a wide range of new applications and services.”Those interested in new business models for the vehicle industry – and its potential impact on tires would do well to read the document.http://www.acea.be/uploads/publications/ACEA_Strategy_Paper_on_Con-nectivity.pdf

Section 7: Upstream and raw materials

Prices of SBR fall as NR prices plungeWell-known pricing commentators ICIS have pointed to a decline in prices for tire raw materials styrene-butadiene rubber (SBR). The price-fall is due to falling prices of natural rubber (NR). Tire makers are delaying purchases as the down-trend in raw material prices look set to continue, they said.On 18 May, non-oil grade 1502 SBR prices were at $1,430-1,500/tonne CFR (including freight from) southeast (SE) Asia.“We expect SBR non-oil grade 1502 price to drop below $1,400/tonne CFR SE Asia for June shipments in view of the huge drops in the NR price,” a tyre producer said.

http://www.icis.com/resources/news/2016/05/25/10001506/asia-sbr-downtrend-to-continue-as-buyers-retreat-amid-nr-slump/

Omsk raises prices for carbon blackFollowing similar announcements from Cabot and Orion, Omsk Carbon Group (OCG) has informed customers of price rises for its carbon black products. The company said, “For the first time since the start of our cooperation, OCG are forced to inform about a change in the carbon black price level in the middle of 2016.”OCG would like to announce an increase in prices for all carbon blacks:1, 2-Series – 60 Euro/mt; 68 USD/mt; 4,532 RUB/mt;3-Series – 45 Euro/mt; 51 USD/mt; 3,399 RUB/mt;

5, 6, 7-Series – 40 Euro/mt; 46 USD/mt; 3,022 RUB/mt.The changes are effective for shipments of products from 2 production facilities (in Omsk and Volgograd) starting June 1, 2016.Carbon black prices have been rising due for a number of reasons. One of these is that carbon black is priced on long-term contracts which use a formula based on the oil price to calculate the daily price of carbon black to tire majors. Despite some recent oil price increases, the formula does not properly take account of the price when oil prices are well below $100/barrel as has been the case for the last year. This has led carbon black makes to raise prices in order to compensate for the formula being applied by their main customers.http://en.omskcarbongroup.com/press_centre/news/show/omsk-kar-bon-grupp-obyyavlyaet-ob-izmenenii-tsen-na-produktsiyu/

Monthly NR report - prices fall as El Niño endsRubber prices fell in May. This was partly due to fears of a drought reced-ing as the El Niño event faded. However, La Niña appears to be triggering heavy rainfalls in parts of Thailand and India and these are disrupting rubber tapping.China remains a concern due to the on-going challenges facing the tire manufacturing sector. Domestic pressures from the country’s supply-side reforms and external pressures from the anti-dumping probes by the US on Chinese tires have led to a slowdown in the growth of China tire exports, which recorded only an increase of just 0.7% in April (YoY).

$1.0

$1.5

$2.0

$2.5 NMCE (India)SHFE (China)SGX (Singapore)TOCOM (Japan)

Mar Apr MayMay 8 2015

June JuneJul Aug Sep Oct Nov Dec Jan2016

Feb

Page 8 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

Global tire markets mixed in March – PirelliA useful resource for western analysts is the periodic analysis of global tire markets by Pirelli (see link below). The latest analysis gives data for the month of March and for the first three months of the year. This is split by tire type: car and truck; and by OE and replacement markets and also by region.

Car tires Europe NAFTA Mercosur China Japan

OE (March) 1% -1% -24% -14% 2%

OE (Year to date) 4% 5% -30% 9% -3%

Replacement (March) 0% 0% 2% NA 3%

Replacement (YTD) 3% 1% -6% NA 1%

Truck tires Europe NAFTA Mercosur China Japan

OE (March) 3% -16% -41% 10% -11%

OE (Year to date) 7% -13% -43% 2% -14%

Replacement (March) 4% 2% -7% - 5%

Replacement (YTD) 6% 0% -8% - -1%http://www.pirelli.com/corporate/en/investors/tyre_markets_trend/default.html

Global tire markets mixed in April – MichelinA useful resource for western analysts is the periodic analysis of global tire markets by Michelin (see link below). The latest analysis gives data for the month of April and for the first four months of the year. This is split by tire type: car and truck; and by OE and replacement markets and also by region.

Car tires Europe (inc Russia)

Europe (excl Russia)

North America

Brazil China

Replacement (March)

4% 5 -7% -4% 6%

Replacement (YTD)

3% 4% 3% -5% 8%

OE (March) 11% 13 3% -20% 5%

OE (Year to date) 4% 6% 4% -22% 6%

Truck tires Europe (inc Russia)

Europe(excl Russia)

North America

Brazil

Replacement (April) 5% 3% -7% -2%

Replacement (YTD) 4% 5% -1% -5%

OE (April) 7% 8% -13% -25%

OE (Year to date) 7% 7% -13% -39%http://www.michelin.com/eng/finance/key-figures-indicators/mar-ket-trends/Passenger-car-light-truck2

EU CV registrations: +12.1% in Q1In March 2016, demand for new commercial vehicles in the EU increased for the 15th consecutive month. Total commercial vehicle registrations grew by 8.0%, totalling 242,049 units.For light commercial vehicles, (up to 3.5 tonnes) which account for the majority of sales in the commercial vehicle market, new registrations totalled 204,157 units, or 7.6% more than in March 2015. Italy (+32.1%), France (+5.0%), the UK (+3.3%) and Germany (+3.0%) contributed posi-tively to the upturn, while Spain (-1.3%) performed less well than last year.From January to March 2016, 466,839 new vans were registered in the EU or 11.3% more than in the same period last year. All major markets saw their demand for vans increase during the first quarter of the year.For heavy trucks (over 16tonnes) March 2016 recorded another double-digit increase (+12.2%), bringing a total of 27,831 new registra-tions. This growth was sustained by significant growth recorded in Italy (+25.2%), France (+18.6%) and Spain (+9.3%). Noteworthy was the contribution of the new EU member states, especially Poland (+46.3%) and the Netherlands (+30.3%), to last month’s volumes.Three months into the year, the EU market for heavy trucks grew by 18.0%, reaching 71,501 units. All major markets saw their demand for heavy trucks increase: Spain (+22.1%), Italy (+19.1%), France (+16.9%), the UK (+13.5%) and Germany (+8.0%).The medium truck segment lies between these weight limits. In March 2016, results for the medium segment were similar to the heavy truck segment, with Italy (+22.0%), France (+18.3%) and Spain (+10.9%) posting double-digit gains. Overall, 34,092 new trucks were registered in the EU, or 11.1% more than in March 2015.From January to March 2016, 87,262 new trucks were registered in the EU, 17.6% more than in the same period last year. All major markets post-ed significant growth, especially Spain (+25.0%) and Italy (+19.2%). For the bus and coach segment, registrations increased (+2.0%) in March 2016 compared to March 2015, with a total of 3,800 units. Growth was mainly sustained by the French (+12.7%) and German (+10.5%) mar-kets, while the UK (-2.9%), Spain (-20.4%) and Italy (-39.3%) performed less well than a year ago.In the first quarter of 2016, the EU bus and coach market increased by 3.7%, reaching 9,031 units. Demand declined in the UK (-13.2%) and

Section 8: Trade and statistics

Italian (-12.7%) markets, while new buses and coaches registrations increased in Germany (+12.7%), France (+11.6%) and Spain (+5.6%).http://www.acea.be/press-releases/article/commercial-vehicle-registra-tions-12.1-in-first-quarter-of-the-year-8.0-in-m

ETRMA reports on Q1 in tire industryThe early months of 2016 showed healthy growth in most markets, lead-ing the industry to forecast stability in the sales trends for the rest of 2016.

In 000 units Q1 2015 Q1 2016 Change (%)

Car/Light truck 51,965 53,285 3%

Truck 2156 2273 5%

Agricultural 436 406 -7%

Two-Wheeler 3297 3441 4%Pressure from imports remained high in 2015:EU imports of truck and bus tires increased by +10%. China remains the main exporter to the EU, with an increment of +12%.

With regard to consumer tires, imports in the EU increased by +6% and imports from China by +9%.

http://www.etrma.org/newsroom/64/75/ETRMA-publishes-its-1st-quarter-data-sales/

Page 9 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

An example of the information to dealers is this checklist of tire storage tips:

DEALERS BEST PRACTICE TIPS:Store on racksStore by speed ratingStock frequent demand on easy-to-access shelvesStock larger tyre sizes on low shelvesImplement a ‘first in-first out’ stock rotation systemMake sure that all staff are properly trained and informed of the correct procedures when handling stock.

This is one of a series of initiatives by the ETRMA. ETRMA is driven by its member organisations. There are the main tire makers as well as the national tire and rubber federations in countries across Europe. ETRMA is funded mainly by the tire makers and it acts on behalf of the tire makers who manufacture tires in Europe. All its actions are designed to benefit those tire makers. It acts primarily as a lobby group to the European parliament, but also acts as a voice for the industry both in Europe and in the world. Among the international tire organisations, ETRMA is by far the most pro-active, driving the introduction of labels in Europe and elsewhere as well as sponsoring meetings to maintain publicity on tire-related activities.http://www.tyreaware.org/pdf/TyreAWARE-Brochure.pdf

who heads Michelin’s truck operations in Europe. http://france3-regions.francetvinfo.fr/pays-de-la-loire/vendee/la-roche-sur-yon/la-roche-sur-yon-un-pacte-d-avenir-signe-michelin-981344.html

Goodyear reports record Q1 profits on lower sales Goodyear posts record profits on slightly lower sales for the three months to March 2016.The company reported record first quarter segment operating income of $419 million in 2016, up from $388 million a year ago. First quarter 2016 sales were $3.7 billion, down from $4.0 billion a year ago, largely due to unfavourable foreign currency translation of $141 million and the de-con-solidation of the company’s subsidiary in Venezuela.

Americas First Quarter

(In millions) 2016 2015

Tire Units 18.0 19.2

Sales $1,951 $2,243

Segment Operating Income 260 248

Segment Operating Margin 13.3% 11.1%

Europe, Middle East and Africa First Quarter

(In millions) 2016 2015

Tire Units 16.2 15.9

Sales $1,251 $1,331

Segment Operating Income 80 73

Segment Operating Margin 6.4% 5.5%

Asia Pacific First Quarter

(In millions) 2016 2015

Tire Units 7.3 5.7

Sales $489 $450

Segment Operating Income 79 67

Segment Operating Margin 16.2% 14.9%https://corporate.goodyear.com/en-US/media/news/goodyear_reports_rec_1233560306.html

ETRMA launches TyreAWARE campaignTyre manufacturers across Europe have launched a publicity campaign under the name TyreAWARE. The project aims to raise awareness of best practices and procedures on tyre maintenance, storage and service life for dealers, authorities and consumers.

Michelin outlines 4-point strategyAt its annual meeting of shareholders on 19 May, Michelin CEO Jean-Dominique Senard outlined a 4-point strategy for the company.The strategy will be deployed in four areas: • Tires, where the Group’s capacity for innovation and understanding of

usage practices enables it to bring to market products seamlessly aligned with customer needs, in a commitment to driving above-mar-ket growth;

• Tire-related services and solutions to make mobility more efficient, a promising market where Michelin wants to step up its presence;

• “Experiences”, the full array of businesses that offer customers an outstanding mobility experience and support them before, during and after their travel; and

• High-tech materials, notably elastomer-based, in which the Group leverages its expertise to deliver product differentiation and which can be marketed to other manufacturers in the mobility industry.

Michelin said its operating procedures are being redesigned to be more customer-focused, capitalize on the digital revolution, simplify organi-zational structures and processes and further devolve decision-making responsibility to employees.See also Michelin strategy analysis on p??http://www.michelin.com/eng/media-room/press-and-news/press-releas-es/Finance/2016-Annual-Shareholders-Meeting

Michelin signs deal with French workersMichelin has agreed a deal with the workers at its last truck tire man-ufacturing plant in France. The deal allows for increased production at the factory in La Roche-sur-Yon, in exchange for more flexibility from the workers. One of the issues that has plagued certain countries in Europe is work agreements that make factories uncompetitive in comparison with facto-ries in India, China Vietnam and other countries. The aim of this deal is to allow Michelin management to change the types of tires being made in the factory in response to market demand at short notice, and without discussion with workers.Michelin has announced an investment of € 56 million to modernise the 730 employee factory. In return, employees have accepted greater flexibil-ity, said the parties. The factory now aims to repositioning itself as a producer of high-end tires and increase production to 1.2 million tires per year against 800,000 at present. “To remain a leader in the European market, we need to mod-ernize and boost the competitiveness of our plants “, said Benoit Heubert,

Section 9: Company information

Page 10 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

It won’t be enough to simply claim something like “We have a zero de-forestation policy and use no rubber from cleared forest land in our products”

Tire makes will need to have documentation that demonstrates where all rubber has come from, and this has to sufficiently detailed to identify any product that comes from recently-cleared forest land.

Supply chain is not fully in controlThe biggest challenge is that not all of the supply chain is fully under control. The diagram left (from Halcyon) shows three main phases. The production and distribution phases are fully under control and it is a simple matter to get full documentation for these part of the production chain.

However, the first phase – Origination – is much less under control and many of the players are reluctant to complete paperwork or otherwise identify themselves.

Our analysisWe believe that within the coming year, many of the top tire makers will seek to put such traceability programs in place before the end of 2016, or in Q1 2017 at the earliest. Michelin already has a commitment to zero de-forestation and a traceability programme. These are due to be updated this month.

As a result of the increased profile of these issues, all participants in the production chain will quickly become aware of this new requirement.

We think it likely that a sub-set of rubber suppliers will remain resistant to this kind of documentation. Tire makers who do not feel the need to work with the NGOs will gravitate towards this sub-set.

We think that many Chinese tire makers will not wish to make a commit-ment to zero de-forestation combined with a robust a verifiable traceability programme.

Thus, we think the pressure from the NGOs for premium tire makers to conform to zero de-forestation policies is likely to drive the supply of rubber from cleared forests into the Chinese supply chain – if it is not there already.

This will further differentiate the global tire industry into leaders, who adopt zero de-forestation policies and followers, who do not.

Once the premium tire makers have their policies in place, we think it almost certain that the NGOs will seek to apply pressure to the Chinese tire makers who seek to build their business in Europe and North America. This is likely to begin within a year from now.

If they cannot address companies in China, they can target their customers and distribution partners Europe and North America.

be converted to other crops.

Zero deforestation commitments are non-negotiableThe NGOs are extremely concerned that ancient forests are being cleared for such short term usage by the rubber industry, and they are calling on all tire makers to commit to a zero de-forestation policy.

Adherence to the Paris Agreement; REDD+, and other international agreements are non-negotiable. The NGOs believe that a zero de-foresta-tion commitment is a non-negotiable requirement for each and every tire maker in the world.

However, the commitment has to be verifiable and robust.

Any tire maker who does not make this zero de-forestation commitment is likely to find themselves the subject of research and exposés by the NGOs.

At this point we have to note that the NGOs are well-funded; they have more people on the ground than the tire makers and they are very capable of making hard-hitting, persuasive videos and well-researched, fully documented text-based reports for distribution to news media and to go viral on the web.

They can use these techniques directly on a tire maker, or on its distribu-tion networks and its customers. Or – as in most cases – on a combination of all three.

They are staffed by smart, committed and confident men and women and are very motivated to effect change.

Only a very brave, or very stupid tire maker would risk their wrath.

Full traceability programmes

By David Shaw

One of the reasons this newsletter is a little shorter and a few hours later than normal, is that I spent the last few days at an invitation-only rubber industry event in Singapore, flying back last night.

I can honestly say that it has been one of the most revolutionary weeks of my life in the tire and rubber industry.

The fallout from the events in Singapore will have a huge impact on the tire industry and its supply chain, and in a short timescale as well.

Civil Society catches us in the spotlightEssentially, the tire makers are now illuminated by the bright spotlight of Civil Society.

That term is used as the collective description of Greenpeace, Global Witness, the Rainforest Alliance and other Non-Governmental Organi-sations (NGOs) that seek to effect change in issues connected with the environment.

Speaker after speaker from these organisations made it clear that they take very seriously such declarations such as the Paris Agreement on Climate Change of Dec 2015; the New York Declaration on Forests from Sept 2014; The Amsterdam declaration on eliminating deforestation from Commodity Supply chains (Dec 2015); the United Nations REDD+ decla-ration on Reducing Emissions from Deforestation and Forest Degradation and others.

These require responsible organisations to commit to zero de-forestation.

De-forestation in the rubber industryIn the Greater Mekong region (Laos, Myanmar and Cambodia), virgin rain-forests are being logged and the resulting cleared space is being planted with rubber trees.

This is not just one or two isolated cases, but it is happening on a large scale. The NGOs are – rightly –very concerned about any clearance of virgin ancient forest.

These plantations produce rubber. Because tire manufacture consumes 70% - 80% of all natural rubber, the NGOs believe that the tire makers are collectively and individually culpable for breaking the agreements noted above.

Still worse, in the case of these rubber plantations, they rarely produce substantial quantities of rubber, as the soil becomes eroded; water tables change and often they are in the wrong locations to get maximum yields from the trees.

As a result the plantations can quickly fall into disuse after which they can

Tire Industry to come under ‘Green’ spotlight

Page 11 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

By David Shaw

In mid-April, the United States ITC published its analysis of the discussions related to actual or potential injury to the US truck tire industry due to alleged dumping and subsidies on Chinese-made truck and bus tires.

The 154-page document can be downloaded from here:http://www.usitc.gov/publications/701_731/pub4601.pdf

There has not been enough time to fully analyse the report, but if anyone is interested in a detailed understanding of the US truck and bus tire industry, it contains a wealth of information.

A quick analysis, however, revealed some interesting information.

First, the six-person Commission gave its majority view, “that there is a reasonable indication that an industry in the United States is materially injured by reason of imports of certain truck and bus tires from China that are allegedly sold in the United States at less than fair value (“LTFV”) and that are allegedly subsidized by the government of China.”

This is the view that was carried and has resulted in further investigation by the Department of Commerce.

There were three dissenting opinions among the six Commissioners. Chairman Meredith M. Broadbent and Commissioner F. Scott Kieff both found that, “there is no reasonable indication that an industry in the United States is materially injured or threatened with material injury by reason of imports of certain truck and bus tires from China that are alleg-edly sold in the United States at less than fair value (“LTFV”) and that are allegedly subsidized by the government of China.”

These two added, “we find that the record as a whole contains clear and convincing evidence that the domestic industry is not materially injured by reason of subject imports. In addition, based on the available information, we do not find a likelihood that sufficient evidence leading to a contrary result will arise in any final phase of these investigations.” (top of page 43)

A third Commissioner, David S. Johanson, also made his separate opinions known. Although he supported the majority view, he was significantly less sure that the industry had been damaged during the period under investigation (POI), which was 2013-2015. He said, “I do not find that the domestic industry is currently in a vulnerable state.” This , he said was largely due to the reduction in the price of natural rubber.

The investigation took place during February and March 2016, when NR prices stabilised or even increased after around 5 years of continuous decline. Johanson said this increase is likely to make the domestic pro-ducers more vulnerable to margin erosion.

He said this new price environment, “could result in price depression and a cost-price squeeze in the imminent future. Although I do not find the

Company Limited (“Zhongce”) of China.

Apparent U.S. consumption of truck and bus tires totalled approximately 26.5 million tires ($5.9 billion) in 2015.

Currently, five firms (one of which began production in October 2015), are known to produce truck and bus tires in the United States.

U.S. producers’ U.S. shipments of truck and bus tires totalled 12.0 million tires ($3.4) in 2015, and accounted for 45.6 percent of apparent U.S. consumption by quantity and 57.0 percent by value.

U.S. imports from China totalled 8.9 million tires ($1.2 billion) in 2015 and accounted for 33.6 percent of apparent U.S. consumption by quantity and 20.5 percent by value. U.S. imports from other sources totalled 5.5 million tires ($1.3 billion) in 2015 and accounted for 20.8 percent of apparent U.S. consumption by quantity and 22.5 percent by value.

Capacity utilisationDomestic capacity utilization increased from 83.8 to 93.5 over the period of investigation. Domestic capacity fell by 2.9 percent, while domestic pro-duction rose by 8.4 percent since 2013. This relatively high level of capac-ity utilization suggests that U.S. producers’ ability to increase production of product in response to an increase in prices may be limited.

Chinese capacity utilization steadily decreased from 87.9 to 83.5 over the period of investigation. Chinese capacity and production fluctuated, but both slightly increased overall, from 2013 to 2015. This moderate level of capacity utilization, coupled with increasing production and capacity levels, suggests that Chinese producers may have a moderate ability to increase production of product in response to an increase in prices.

Price premium for EPA Smartway certificationThe vast majority of U.S. producers and importers reported selling truck and bus tires classified as EPA Smartway certified. U.S. producers reported that an estimated 46.7 percent of total truck and bus tire sales were Smartway certified, with an estimated average 5.7 percent price premium compared to non-certified truck and bus tires. Importers reported that an estimated 29.4 percent of total truck and bus tire sales were Smartway certified, with an estimated average 5.0 percent price premium compared to non-certified truck and bus tires

Price premium for retreadabilityThree of four U.S. producers and 17 of 28 importers reported selling truck and bus tires with retreading warranties or guaranties. U.S. producers reported that an estimated 70.6 percent of their truck and bus tire sales have retreading warranties/guaranties, with an average price premium of 13.8 percent over truck and bus tires without warranties/guaranties.

Importers reported that an estimated 47.1 percent of their truck and bus tire sales have retreading warranties/guaranties, with an average price premium of 8.6 percent over truck and bus tires without warranties/guar-

domestic industry vulnerable to material injury, I do find that the likely increase in subject import volume, combined with the likely adverse price effects, will likely result in a worsening of the domestic industry’s condition and material injury in the imminent future.”

The two dissenting commissioners reviewed the evidence and found that, found that, during the period under investigation (2013-2015), “The domestic industry’s financial performance improved in every metric.”

This was largely due to the decrease in input costs, notably from the price of natural rubber. The two dissenters said selling prices of the tires had fallen during the period, but this was more than compensated by the reduction in input costs. As a result said the two, “the domestic industry had high and rising profits throughout the POI.

OE and replacement. The report identifies that OE customers took a significant share of U.S. producers’ truck tires, whereas the OE share of imported tires was much lower.

Year US producer Importer

OE Replacement OE Replacement

2013 38.5% 61.5% 3.5% 96.5%

2014 40.3% 59.7% 3.4% 96.6%

2015 41.1% 58.9% 4.9% 95.1%

Although the fraction of OE taken by imported tires, the commission noted that the percentage increased significantly in the final year of the investigation.

Commissioner Johanson noted that this increase in itself represents some-thing of a threat to the domestic producers, who have until new have not felt significant competition from imports in the OEM segment.

Commissioner Johanson noted that further research will identify whether this late-identified trend is in fact significant.

Market summary

The Commission noted that leading players in the domestic industry are Bridgestone Americas Tire Operations, LLC (“Bridgestone”), Continental

Tire the Americas, LLC (“Continental”), The Goodyear Tire & Rubber Company (“Goodyear”), and Michelin North America, Inc. (“Michelin”), all of which are multinational companies.

They identified the leading importers as Aeolus Tyre Co., Ltd.

(“Aeolus”), Double Coin Holdings Ltd. (“Double Coin”), Giti Tire Group (“Giti”), Triangle Tyre Co., Ltd (“Triangle Tyre”), and Zhongce Rubber Group

Truck and Bus Tires From China - ITC analysis

Page 12 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

Wages2013 2014 2015

Production-Related Workers (PRWs) (number)

6,378 6,328 6,423

Total hours worked (1,000 hours) 13,949 13,867 14,048

Hours worked per PRW (hours) 2,187 2,191 2,187

Wages paid ($1,000) 315,507 331,838 337,610

Hourly wages (dollars per hour) $22.62 $23.93 $24.03

Productivity (tires per 1,000 hours) 978.6 1,047.2 1,052.9

Unit labour costs (dollars per 1,000 tires)

$23.11 $22.85 $22.83

Pricing mechanismsMethod U.S. producers U.S. importers

Transaction-by-transaction 4 13

Contract 4 8

Set price list 4 22

Other 0 3

U.S. producers reported selling most of their product under long-term con-tract for OEM sales, but primarily using spot sales for after-market sales Importers reported selling most of their product in the spot market for both OEM and after-market sales.

Prices decreased during 2013. Domestic price decreases ranged from 8.2 to 12.3 percent for OEM prices and 10.9 to 13.5 percent for after-market prices during 2013-15. Import price data were limited and sporadic for sales to OEMs. 5 Import price decreases ranged from 30.6 to 36.3 percent for after-market sales.

Quantity (1,000 tires)

Capacity 16,284 16,435 15,812

Production 13,650 14,522 14,791

Capacity utilization 83.8% 88.4% 93.5%

Truck and bus tires: U.S. producers’ U.S. shipments by end use, 2015

2015

Quantity (1,000 tires)

Value ($1,000)

Unit value ($/unit)

Share of volume (%)

Share of value (%)

U.S. producers U.S. shipments.--

Heavy duty - Steer / all position

3,600 1,062,565 295 29.8 31.4

Heavy duty - Drive 3,347 992,114 296 27.7 29.4

Heavy duty - Trailer 2,850 783,333 275 23.6 23.2

Medium duty - Steer / all position

1,416 330,762 234 11.7 9.8

Medium duty - Drive

706 161,867 229 5.8 4.8

Medium duty - Trailer

163 49,456 303 1.3 1.5

Subtotal, heavy duty 9,797 2,838,012 290 81.1 84.0

Subtotal, medium duty

2,285 542,085 237 18.9 16.0

Subtotal, steer / all position

5,016 1,393,327 278 41.5 41.2

Subtotal, drive 4,053 1,153,981 285 33.5 34.1

Subtotal, trailer 3,013 832,789 276 24.9 24.6

Total U.S. ship-ments

12,082 3,380,097 280 100.0 100.0

anties.

Multi-tier businessBoth domestic and importers identified around 4 tiers based on price and performance.

U.S. producers reported that tier 1 or highest quality truck and bus tires generally include retreading warranties and higher product performance (increased mileage and fuel savings), and sales target OEM and national fleets and larger service networks.

U.S. producers reported that mid- to lower-tiers (generally tiers 2-4) truck and bus tires will have lower prices and lower quality, and sales are less likely to target OEMs.

Importers reported that tiers 2-4 truck and bus tires will have lower prices, limited distribution, and more limited range of end uses for heavy duty vehicles.

One importer reported that tier 1 truck and bus tires have a large OEM and national fleet presence, broad product offerings (approximately 200 stock keeping units (“SKUs”)), higher overhead and promotional costs, heavy field support (an average 200 sales and engineering employees), and sales support through dealers and distributors.

Tier 2 products are sold for around 80% of the price of the premium prod-ucts but typically operate with just half the number of SKUs, and much more limited field support.

Tier 3 might sell at 55-75% of the premium product and have around 50 SKUs with sales through wholesalers, brokers and a few dealers.

Tier 4 have minimal support and sell at less than half the price of a premi-um product.

Most of the respondents identified Michelin, Bridgestone and Goodyear as Tier-1, while Continental, Hankook and Yokohama were considered Tier-2

The vast majority of U.S. producers and importers reported that brand influences the price consumers are willing to pay for truck and bus tires.

The purchasing decisionThose who alleged they had been damaged by cheap imports were asked what influenced the purchasing decision. The major purchasing factors identified by the responding firm were quality, price, and availability.

On that subject, five importers cite availability as being an important non-price factor. One of them reported that truck and bus tires from China have delays in shipping product to the East Coast and inland destinations.

Truck and bus tires:

U.S. producers’ production, capacity, and capacity utilization, 2013-15

Item 2013 2014 2015

Page 13 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

The company’s main retail service network is Euromaster. It says 27% of sales are in services and solutions, with most of the rest in selling and fitting tires.

It aims to grow its portfolio of around 4000 service centres and dealers in 2015 to over 5000 by 2020, and to promote cross-fertilization and best-practice activities between geographies and business models

Fleet managementGilson Santiago, CEO of Michelin’ recent fleet management acquisition in Brazil, Sascar, said Fleet management is a growth opportunity. Michelin acquired SASCAR in 2014. The company specializes in fleet management and the monitoring and location of vehicles and cargo.

Brazil is a good place to start, because around 40% of the truck market is equipped with telematics systems, compared with a global average of 5-15%. But globally, this figure is expected to rise to 50% by 2025. Michelin estimates that providing these services to truck fleets can result in revenues of €20-€30/vehicle /month in Brazil and €30-€50/vehicle/month in N America and Europe.

However, in specific applications, such as transportation of dangerous goods, this could be higher.

Michelin and Sascar are now running a pilot scheme with Brazil’s largest fuel provider to optimize fleet operations using services and technology available in both Michelin & Sascar • Tire Inspection (Michelin) • Tire Services (Michelin) • Telemetry based on CAN bus + TPMS (Sascar)

In the car segment the revenues are likely to average around €5-€10/month generated through stolen vehicle and young driver insurance packages.

The company has developed a plug-and-play tracker unit which can detect harsh braking and acceleration; engine speed and other aspects of driver behaviour as well as location.

Sascar is based in Brazil, but the company is now moving outside of Brazil, starting with Mexico, but seeking to take advantage of Michelin’s worldwide footprint.

RPM

CAN bus data

Odometer Speed Fuel

123 km

RFID

Wireless accessories network

CAN bus

Tracking Device

Door sensors

Door sensor

Satellite Antenna

5th wheel lock

Gear sensor

+ ID

Temperature Sensors

Trunk lock

Tablet

Keyless ID + Panic + Immobilizer

SAS 1234

Tire ID TPMS (x12)

Cargo Tracck®

All equipment are remotely triggered and read

tion strategy starts with end users.”

He said Michelin is building geographic coverage to reach the end users. Then, selecting the most appropriate format to better serve customer needs:• Brick and mortar (Tire Specialists, Fast-Fit, Comprehensive garages,

Industrial Service) • Mobile services • Click and mortar • Internet pure-player

And finally implementing the right operating models:• Company owned • Company Owned Dealer Operated (CODO) • Franchise • Partnership

In general, the company wants to move away from equity-ownership to a more entrepreneurial system in which the franchise model plays a strong role.

It is seeking to make targeted investments in digital operations and also reducing its ownership of land and property. It seeks to create an energetic, entrepreneur-style operation, and this, the company believes, favours the franchise model.

Michelin believes its internal skills in distribution are key: it can support its partners with fast, accurate deliveries and create a service-minded culture all with the aim of improving the customer experience in tire and vehicle maintenance.

In the EU, Michelin has 2225 service centres in 17 countries. 917 of these are franchised operations.

In the US, Michelin has 415 service centres of which 350 are franchised under the Michelin Commercial Service Network brand.

Michelin has a further 1651 service centres in the rest of the world, including China, Russia. Australia, India, South Africa and the Gulf region. Most of these are under the TyrePlus brand.

Michelin notes that Digital distribution channels enjoy double-digit growth even in flat or mature markets.

Tire manufacturers

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Strategy analysis: MichelinAt an investor day meeting hosted at the main Michelin technical centre in Ladoux, France, Michelin senior management outlined their strategic goals for the period 2017-2020.

Jean-Dominique Senard, CEO, said, the company has four main domains for growth with associated targets:• Provide our customers with tires that truly meet their needs Increase by 20% revenue from tire business • Develop tire-related services and solutions that further enhance mobility Double revenue in our services and solutions business • Strengthen all the activities that enable our customers to enjoy unique

mobility experience Triple the revenue generated by these mobility experience businesses • Leverage our expertise in high-technology materials – in particular

those involving elastomers Be proactive and assert our technological leadership in the area of high technology materials.

To go with this, the company has four main initiatives to support growth;

• Putting our customers at the heart of our business • Leveraging the digital revolution • Simplifying our structures and processes • Empowering employees

Moving to service business modelFlorent Menegaux, Chief Operating Officer, said one of the key strategies for the management is to convert the business model away from selling product volumes toward selling services and solutions.

The company has noted that many companies are outsourcing non-stra-tegic activities. This offers opportunities to deliver solutions to those companies in the field of mobility.

Another driver for this is the increasing saturation in many markets and the consequent pressure on margins.

Michelin therefore intends to double service and solutions net sales from €1bn in 2015 to €2bn in 2020. Michelin’s total net sales in 2015 were €21.2 bn.

Management believes this transition will offer resilience through economic cycles.

It has demonstrated its ability to deliver these services in Brazil where it has around 240 thousand vehicles under solutions contract through the SASCAR subsidiary. It now plans to extend this offer to Europe, the rest of the Americas and China.

Distribution is about customer experienceYves Chapot, Executive Vice President, Distribution said, “A good distribu-

Page 14 of 14 — Dateline: 10 June 2016 © 2016 Shaw Information Services Ltd R E S E A R C H

by 30%.

The key measures are • Purchasing less customized machinery; • More streamlined work flows • More flexible building blocks • Co-designing products and processes • Optimized engineering processes

SWOT analysisMarc Henry, CFO and Executive Vice President, Specialty Products Busi-ness Units outlined an internal SWOT analysis thus:

STRENGTHS • First worldwide tire brand • Global and balanced sales footprint • Pricing power • Demonstrated innovation capacity • Strategic vertical integration • People commitment and skills • FCF generation

OPPORTUNITIES • Fleet services demand • E-business • Increasing presence in Tier 2 / Tier 3 segments

WEAKNESSES• Cost Structure • Industrial Footprint • Supply chain effectiveness • Management information systems

THREATS• Worldwide GDP decline & weakening demand • Tier 4 competition • Industry over capacity and pricing pressure

Market projectionsMarc Henry, CFO and Executive Vice President, Specialty Products Busi-ness Units said Michelin expects the total passenger tire market to reach 1690m units by 2020, from 1495m in 2015. For truck & bus radial and bias tires, the number will increase to 200m units in 2020 from 184m units in 2015.

In mining tires, Michelin thinks 2016 will be the last year of de-stocking, with volumes down by 10% from 2015 numbers. That should recover in 2017 to close to the 2015 figure and then increase slowly to 5% - 10% above the 2015 figure.

Similarly in agricultural tires, Michelin expect level market conditions in 2015, 206 and 2017, with around 5% growth by 2020.

Improving efficiencyFrançois Corbin, Executive Vice President, Direction of Progress and Geo-graphic Zones said, Simplification is a key priority for Michelin Managers. Shareholders, employees and managers are all calling for more local empowerment and simplification of the business processes.

The company is looking hard at the Selling, General and Administrative (SG&A) expenses of Michelin and its major competitors.

One example of this is to reduce to 7 regions from 10, its sales and mar-keting zones within Europe.

The UK and Nordic countries will be merged. The southern and northern regions within central Europe will be merged. France will be merged with the Benelux region.

A series of other organizational measures are expected to save around €142m in 2016 alone, but much more as time goes on.

New materialsJean-Christophe Guérin, Executive Vice President, Materials Product Line said the company expects to increase the number of factories exceeding 100,000 tonnes/year output. Michelin has traditionally operated small factories compared to its main rivals who claim economies of scale.

In 2015 Guérin said Michelin operated 15 of these large-scale plants, up from 12 in 2012, but he wanted the number to rise to 18 by 2020.

In particular, Michelin measures the Capex cost per tonne of passenger car output. Guérin said Michelin plans to change its approach to develop-ing new factories, and this will reduce the capex cost per tonne of output

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An average competitive position // A positive trend vs. many competitors // We will improve it

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The company aims to double net sales by 2020. The company reported sales of BRL 318m (USD91m) in 2015.

R&D to play strong roleTerry Gettys, Executive Vice President, Research and Development, said Innovation contributions are critical for the Group’s performance. In particular, technological advances enable Michelin to sustain its pricing power and help to control costs.

The company operates four main tech centres and a further four subsidiary facilities. Together, the eight centres employ 6000 people and spend some €689m each year. Michelin said this figure is likely to stabilize around €700m annually, even as the company grows.

The main tech centres carry out research and pre-development as well as fundamental innovations and market development and process engineer-ing. They are located:• Ladoux, France• Greenville, SC, United States• Tokyo, Japan• Ota, Japan

The subsidiary units are focused on market development and process engineering and are located in:• Shanghai, China• Gurgaon, India• Bangkok, Thailand• Rio de Janeiro, Brazil.

Gettys said, new materials play a dominant role in Michelin’s innovation.

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