Tire market profits plummet, manufacturers still want to expand production?
On January 15, 2025, the third quarter report of the fiscal year (October to December 2024) of CEAT, a well-known Indian tire manufacturer, showed that its profits plummeted by 18.6%. Do you think this is just the performance of a tire company?
Wrong! Most Asian tire companies are the same!
Because Asian high-quality and cost-effective tire products are usually very cost-sensitive, they are extremely susceptible to rising raw material prices. It is this factor that caused CEAT's profits to plummet in the last three months of 2024. In terms of sales, CEAT's performance is very solid-sales increased by 11% in the same period to 33 billion Indian rupees (about 2.8 billion yuan).
Therefore, although it saw the fact that it was not profitable, under the "ignition" of sales, CEAT decided to expand its production capacity and occupy more markets with stronger tonnage.
Recently, the manufacturer proposed to expand its factory in Maharashtra, India, and increase its production capacity by 30%.
Profits plummeted by 19%, and the tire company insisted on expanding production capacity by 330 million
It is reported that CEAT's investment in this expansion is about 4 billion rupees (330 million pounds), and the plan is to expand production capacity by 30%.
Previously, overseas institutions revealed that the daily production capacity of the factory is about 114 tons, and the products are mainly motorcycle tires. But if the expansion can be successfully completed, the annual production capacity here can be increased by 3,500. This also means that here is not only expanding production capacity, but also expanding product categories with a high probability. The 589 million large project boosted sales growth, and tonnage must be increased.
This is not CEAT's only expansion plan in the past two years. Since the restart of truck tire expansion in 2023, CEAT's capacity layout "brake" has failed. In CEAT's view, it has now reached the most urgent stage of development. Even in India, as one of the "four major families" of local tires, CEAT's market share is not an advantage. It is reported that CEAT's share in the local area is only about 10%.
In addition, due to the downgrade of global tire consumption, the hot sales of high-quality and cost-effective tires are giving the world's emerging dark horses the last chance to seize the market. Therefore, if CEAT wants a higher share (whether it is its local share or global share), it must first increase its "tonnage".
Therefore, after 2023, CEAT spent 7 billion rupees (about 589 million yuan) to restart the second phase of truck tire capacity expansion. According to the plan at the time, this investment helped CEAT increase its monthly truck tire production capacity by 90,000.
In 2024, the new capacity was put into production, and of course it also helped CEAT achieve an 11% increase in sales from October to December 2024.
Ignoring costs, production expansion is necessary
However, in 2023, CEAT's profits were upward, which was the endorsement of the expansion investment at the time. But in the second half of 2024, profits plummeted, and the expansion of production at this time cannot but be called a "risky move".
And such a risky move is obviously also being taken by Chinese tire companies. The 30% increase in costs in the second half of 2024 is experienced by tire companies around the world. However, dealing with rising costs is the responsibility of factories, dealers and retailers, and has little impact on car owners.
Due to consumption downgrade, car owners prefer tires with a higher quality-price ratio, which has brought more orders to Asian tire companies. For many emerging dark horses in the tire industry, if they do not seize the opportunity to sell more tires now, they will not only lose sales, but also the opportunity to cultivate car owners' consumption habits. Therefore, even if there is "less money" or even "no money" in their pockets now, they must grit their teeth and insist on expanding production to prepare for the future.
Therefore, it can be seen that the worse the business is, the more the tire factory will expand. Just like the explanation given by CEAT in its financial report: "Costs will always come down, and there will be steady development in the future."
First occupy the land, wait until the raw materials come down (in the view of tire companies, raw materials will always return to normal levels), and then make money!
But is this development idea really correct? Before 2015, many large Chinese tire companies also did this, but what happened in the end? Because the product homogeneity is too high and the substitutability rate is also high, the final fate of many large tire companies that cannot win the price war is also bankruptcy and reorganization.
Maybe they really relied on production capacity to "rule the king of the mountain" at that time, but they didn't wear the crown for a few days!
CEAT Tire
Data at the end of 2023 showed that CEAT currently has 6 factories around the world, with an annual production capacity of about 10.23 million passenger car tires and motorcycle tires, and an annual production capacity of about 310,000 tons of special tires.
