Japan December 2011 OEM tyre sales atypically strong

by SR on January 17, 2012

The Japan Automobile Tyre Manufacturers Association (JATMA) published sales figures for December 2011 and for the year of 2011 on the evening of 16 January, about 8 days later than the usual monthly release due to the effect of the New Year holidays in Japan. Key points:

  • 2011 was a good year for replacement tyre sales, understandably very poor for OEM.
  • December 2011 replacement tyre sales were a bit meh, neither good nor bad.
  • Unseasonal strength in December auto production is suggested by strong OEM tyre sales.
  • 2012 likely to see a substantial increase in OEM tyre sales, which should keep capacity tight.
  • Replacement tyre sales the big unknown in 2012, but will probably post a solid expansion.
  • Overall I’m bullish on tyre stocks given the potential for pretty significant profit growth in 2012.

The core issue for investors is not the industry data as such, but how it affects the stocks going forward. I have more detail on that in an upcoming post. For now, her is some additional colour on December and 2011 sales. (Click on the charts for a larger image.)

December sales: I’ll keep this short…

Total December 2011 monthly sales were mediocre. Combined replacement and OEM tyre sales came to 10.23 million units in December, a fall of 17.9% month-on-month and an increase of 1.5% year-on-year for the month. Replacement came in at 6.04m, -27.3% MoM, a figure that looks terrible but is actually seasonally normal. Year-on-year, replacement sales fell 4.4% in December.
Year-on-year change in total tyre sales in Japan by month and year

On the positive side, it’s clear that auto production is still recovering. OEM tyre sales for December rose by 1% relative to November to 4.19m units, suggesting a similar sequential rise in auto production in Japan (logically enough tyre sales and auto output go hand-in-hand). Note that official auto production figures for December 2011 will not be released until the end of January. A flat or positive figure for Japan auto production in December would be significantly higher than the typical month-on-month decline of 5 to 15% in December relative to November. This is nothing good but nothing to get too excited about: it simply suggests that Toyota and others are still making up lost ground in terms of production after the disruption caused by the floods in Thailand.

Looking back on 2011

I guess I can sum up 2011 as a very good replacement tyre year, and a very bad OEM tyre year. Total tyre sales were 114.1 million units in calendar 2011, a fall of 1.7% year-on-year. Within that, replacement tyres rose by 6.9% Yoy to 71.7m units. That may not sound like much, but it’s the second-highest rate of annual growth in our JATMA-derived database, which begins in 1995. So a solid performance. OEM (new car) tyre sales were of course hit by the disruption to auto production caused by the Tohoku earthquake and tsunami of March 2011 and accordingly fell by 13.5% YoY to 42.4m units. Unsurprisingly this was the second-largest annual decline in our database, after the 31.5% implosion of OEM sales recorded in calendar 2009.
Japan annual tyre sales in millions of units

OEM tyres in 2011

Ouch, what a year. This is all about auto production, obviously. In 2010 49 million OEM tyres were sold in Japan compared to 9.6m autos, so on average, 5.1 OEM tyres were sold for every vehicle manufactured in Japan. Naturally, when auto production slumps, so do tyre shipments. The chart below shows the impact of the March 2011 Tohoku earthquake and the accompanying tsunami that ripped into the auto supply chain and disrupted production until September.
OEM tyre sales in Japan by month and year

A glance at the month-on-month change in OEM tyre sales (below) shows this clearly. Shipments plummeted by 46% in March 2011 compared to the month of February 2011. This is the largest sequential decline on record and that happened in a month (March) that for seasonal reasons usually rises compared to the previous month. April was weak, but not a clear outlier like March. Finally with very little damage to the tyre factories (see below) in Northern Japan, output recovered in dramatic fashion in May and June 2011.
Month-on-month percentage change in OEM tyre sales in Japan

Resurgent production to drive OEM tyres in 2012

Tyre companies generally don’t like making OEM tyres very much, as margins are significantly lower than on replacement tyres. Why do they do it? Largely to keep close tabs on the latest developments at the auto manufacturers. Nearly every new car from a major OEM has a set of new tyres developed, or at least tweaked, specifically for that car. This puts a heavy burden of testing on the tyre manufacturer (Bridgestone’s test ground in Tochigi, only one of many around the globe, has more than 100 cars including 3 different models of Porsche) but ensures that they get early warning of trends in car design.

Over the past few years the rise in raw material costs reduced already-slim margins to nothing or even negative levels, so tyre companies have been passing on higher input costs in the form of higher OEM tyre prices. For Japan, this is a sea-change for the OEM side of the business. Now most customers (auto OEMs) have escalator clauses built into their contracts that automatically lead to changes in tyre prices according to a carefully negotiated formula that takes raw material costs as inputs.

Natural rubber is particularly important, as it is more open to speculation and more volatile than synthetic rubber. Bridgestone is set to use close to 1.8m tons of rubber for its tyres. If half that is natural rubber, that means 0.9m tons. If natural rubber cost an average of $5/kg in 2011 (that’s my estimate; it’s not disclosed by the company) and it uses 975k tons and the yen/dollar rate averages 80, then the total cost of that natural rubber to Bridgestone would be about 390 billion yen. At a cost per kg of $3.20 and a yen rate of 77 the overall cost should in theory decline to around 240bn yen — a boost to profit of 150bn yen, and this is for a company (Bridgestone) that is only forecasting 194bn in operating profit for 2011. This would be in addition to any positive impact from higher tyre prices or from operating leverage.

Thailand natural rubber price in US$/kg

So if, as I expect, production of autos in Japan soars in 2012, the OEM tyres will not be a potentially money-losing proposition as they may have been a few years ago. Naturally, the tyre suppliers would prefer to sell more replacement tyres, but a strong OEM tyre market leads to tight capacity and makes price wars less likely. In general, I see it as a positive environment for OEM tyres. How much growth can we expect? A range of 5-10% YoY in Japan OEM sales in 2012, biased towards the high end, would be reasonable in my view.

Replacement tyres on the other hand had a great 2011

What is most striking about replacement tyre in 2011 is the way that sales rebounded sharply after the Tohoku earthquake. The red line in the chart below shows the path of replacement tyre sales through the course of 2011. Note how it doesn’t show the usual seasonal slump in April and that the decline in May is muted. This strength may have been caused to some extent by an increase in car tyre prices announced by market leader Bridgestone on 9 February and implemented on 1 June 2011.

I think panic buying after the earthquake also played a part. In central Tokyo in the days following the quake, convenience stores were mostly emptied of staple foods and in the Bic Camera electronics store in Yurakucho near Ginza sales of batteries were being made on a strict allocation basis to prevent people buying up stock. It is possible that consumers were concerned that the proximity to the Fukushima nuclear powerplant of Sumitomo Rubber’s tyre factory in Shirakawa (also in Fukushima prefecture) would lead to shortages of tyres.
Replacement tyre sales in Japan by month and year

Looking through the year in the chart below we can see that in April 2011 replacement tyres caught up with the levels recorded at the time point in previous years and that in May 2011 shipments even surpassed the relatively strong year of 2007. That strong performance continued through most of the rest of the year, although 2011 shipments fell slightly below 2007 levels during the final couple of months. Still, 2011 was a pretty good showing by any standards.

Running total of replacement tyre sales in Japan by year

Looking ahead to replacement tyre sales in 2012

I don’t expect a great deal from Japan in 2012, but I do expect growth in replacement tyres, though likely more modest than in 2011 and certainly 2010. From 1995 to 2008 the annual mean of replacement tyre sales was 72.6m units and only in 2011 replacement tyre shipments finally got back above the 70 million unit line after three years below. Why should it go any higher? The key is that tyres are consumables.

Annual sales of replacement tyres in Japan

Let’s take a fairly pessimistic (realistic?) view and assume that – major recessions aside – the ‘natural’ level of replacement tyre sales, given Japan’s vehicle park, was about 70m units for 2008 to 2010, or 210m units in total. We actually saw 200.5m units over that time, which suggests “missing” sales of 9.5m units. By “missing” I mean that drivers consciously deferred purchases of new tyres by driving longer on their existing tyre sets and accepting any reduction in performance or in safety. If we zoom in on the chart above by compressing the Y-axis the market’s cyclical rhythm becomes clearer. Sales rise, we get a recession, sales fall, sales rise again. Note that the upward leg of the cycle has in the past lasted for three years, so 2012 may be our last year of growth for a while. Of course, these things aren’t set in stone.

Japan annual replacement tyre sales, showing cyclical pattern

The process of deferring purchases has its limits due to the fact that tyres wear in use. I expect consumers who have held off on purchases of new tyres to do some buying in 2012. Now, overall economic activity including vehicle miles travelled will also have fallen during that time, so tyres will not have been worn as much and we may not get 9.5m units coming back. Still, an additional 5-6m units or so might be possible, although that would probably be spread across 2012 and 2013. An incremental sell of 3m units in 2012 would be equivalent to 4.2% YoY and that’s probably all we can hope for in Japan. But that might be enough…

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