Japan tyres: September auto exports likely slumped

by SR on October 11, 2012

Japan tire sales, cumulative in million units

Export crash?

Conclusion: Auto production figures for Japan in September 2012 will not be released until the end of October but just-released OEM tyre sales figures from JATMA suggest that auto production in September was quite abnormally weak.

If this was indeed the case, then the only sensible explanation I can think of is that September auto exports from Japan posted a multi-region slump that would indicate a far broader problem than the recent weakness in China. Overall, tyre sales are still up significantly year-to-date but this weakness in OEM tyre demand is a disturbing development. Caveat: while OEM tyre sales typically move in line with auto production, very occasionally there is a temporary dislocation between the two. If the softness we saw in September is no more than such a short-term dislocation, then in the post below we’re making a mountain out of a molehill. But right now, I’m a bit worried.

A good month for replacement tyres

Total Japan tyre sales in September came to 10.1 million units, falling 8.1% year-on-year and rising 19.2% month-on-month. For the January to September 2012 period total tyre sales are 83.9 million units, up 7% over the same period in 2011. That sequential increase in total tyre sales was driven by replacement tyres, sales of which reached 6.3m units in September, down 4.2% YoY but up 28.9% MoM. That’s a very good figure because while September is a solid “up” month, +28.9% is the third-highest figure for September since 1999, beaten only by September 2011 and September 2004. As I have mentioned in previous posts, replacement tyre demand in Japan in 2011 was abnormally strong due (a) hoarding after the North Japan earthquake in March 2011 (b) tyre price rises in June that encouraged consumers to buy at the lower price and (c) some consumers postponing auto purchases and replacing tyres instead of buying a new car.

OEM was terrible, but why?

OEM was a different story. Let’s take a look at what we would normally expect for OEM tyres in September. Given that August is a holiday month, September typically sees a big rebound as auto assembly factories come back on line. OEM tyres rose 5.7% in September 2012 compared to the previous month of August 2012, but as you can see from the chart below, that was a very poor performance. The median month-on-month change for the month of September between 2000 and 2011 was +30%.

Japan orignal equipment tire sales, month-on-month change for the month of September

As we have noted many times before, the change in OEM tyre sales in Japan correlates very closely to the change in auto production, which is not surprising. Tyres are used only on vehicles and the widespread use of just-in-time production in the auto industry in Japan would naturally lead to sales of tyres for new cars in any given month tracking auto production. The chart below shows this very tight relationship. There are only two significant outliers, one in January 2007 (the explanation for which doesn’t come to mind) and one in May 2011, after the North Japan earthquake.

Japan OEM tyre sales vs Japan auto production 2000-2012

Moreover, the tyre sales data is released about 3 weeks earlier than the auto production data, which gives us an early read on auto output. So, if OEM tyres only rose 5.7% MoM, it suggests that auto production only rose by 5-7% month-on-month in September 2012, to between 773k and 789k units for the month. That would be a very poor result, given that the median month-on-month change for auto production in September for 2000 to 2011 was +33.7%, as per the chart below.

Japan auto production, month-on-month change for the month of September

Auto production is driven by two components of demand: domestic sales and exports. Data for domestic sales in September has already been released and was worse than usual. The median month-on-month change for September auto sales in Japan is +53%. In September 2010 it was +11.1% and in September 2011 it was +40.1%, a bit below the long term average, but even if we discount the longer term figure of +53% and assume that a 40% month-on-month increase is still seasonally representative, sales in September 2012 should have been in the region of 520 thousand units. The actual figure for sales was 446.7k units, 73k less than our estimate. That 73k in auto production is is equivalent to 355,000 tyres (roughly 4.8 tyres are sold for every auto manufactured in Japan because many use spare tyres as well as the tyres on the wheels).

Japan monthly auto exports as percentage of Japan auto production

So, the shortfall in September auto sales was likely responsible for about 355k fewer OEM tyres sold. If we add this 355k back to OEM tyre sales in September 2012 of 3.775 million units then OEM sales rise to 4.13 million units. That adjusted figure implies an increase of just 15.6% month-on-month in September – still very weak in seasonal terms.

If auto production was indeed weak in September and if worse-than-seasonal domestic sales can only explain a fraction of this, the remaining weakness must be in exports. If we subtract from our estimated auto production figure for September of 789k units the sales of 446.7k units, we’re left with exports of 342.3k units for September 2012, compared to 344k reported for August. That would be a terrible figure given that the median month-on-month change in September auto exports from 2000 to 2011 was +24.5%. That is, we should be seeing 344k units increase by 24.5% or 84k units in September, but instead they look to have been flat.

Our first impulse might be to blame poor sales in China for this softness in exports, but exports to China from Japan run to only about 20k units per month (see chart below). Still, exports likely have been hit by the dispute with China over the Senkaku Islands, so let’s say that exports to China were zero in September and knock 20k units from the 84k-unit gap we just mentioned. We’re still looking for an explanation for the remaining 64k units. Europe looks like an obvious choice, but total auto exports to Europe from Japan have only averaged 81k units over the past 12 months. While I’m prepared to accept that exports may have fallen as Japanese OEMs try to avoid a build-up of inventory in Europe, it’s hard to think that exports to Europe in September 2012 were at zero or close to zero, given that exports to Europe didn’t fall below 40,000 units per month even during the darkest days of the global financial crisis of 2008-2009.

Japan monthly exports by region, average from August 2011 to August 2012 (units)

While it is not impossible that Japanese vendors have done an emergency crash stop on exports to Europe alone, I suspect that it is a combination of weakness in China, Europe, Oceania and in South-Central America. I note that Brazil auto sales fell off a cliff in September, so that and weakness in other Mercosur countries (exports to South-Central America account for about 32k units per month) probably explains most of the softness in exports that seems to be implied by the weakness in OEM tyre sales in September 2012.

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