Raw materials and labor are rising, how should tire companies deal with it?

What is the biggest interference factor in making money in the tire business? Exchange rate? Raw materials? Transportation costs? Labor?

As many tire companies have released financial data one after another, the biggest volatility risk in the tire industry has been exposed...

High raw materials, different companies have different impacts
In 2024, many tire factories are going crazy when facing changes in raw material prices. Since the third quarter, tire prices have started to rise and soar - the increase in one quarter has reached or even exceeded 30%. The price of natural rubber has hit a five-year high of 19,000 yuan per ton.

Asian tire companies, which have huge profit stickiness to costs, have almost collectively seen lower profits. The situation of multiple increases in profits throughout the year in 2023 no longer exists.

Indian tire manufacturer Apollo's profits from April to December 2024 plummeted by 31.5%. However, although the two leading tire companies, Michelin and Hankook, have also suffered the same high raw material cost impact, their profit performance is still acceptable.

Michelin's operating profit only fell slightly by 5%, and Hankook's operating profit even increased by more than 32%. Both tire companies acknowledged the existence of raw material cost pressure, and Michelin even released raw material cost data from 2019 to 2025. It can be seen that the pressure on tire raw material costs in 2024 has increased by nearly 50% compared with 2020, but Michelin's operating profit margin has remained at a high level in the past five years-more than 12%.

Michelin specifically mentioned that the sales of high-value passenger tires of 18 inches and above are the key to their high profit level. Sales of tires of 18 inches and above account for 65% of Michelin brand passenger tire sales. With such a sales share, Michelin's passenger tires and two-wheeled tires have an operating profit margin of 13.1%, exceeding the total operating profit margin of the business line. Hankook Tire has also been adhering to the implementation of large-size tire sales strategy in recent years.

In 2024, the sales proportion of Hankook Tire's 18-inch tires rose to 46.5%, a year-on-year increase of 2.3%. Hankook Tire's profit margin also reached 18.7% with the help of more large-size tire sales with high premium space.

It can be said that although they all feel the pressure of rising raw material prices, holding more high-value products has reduced the stickiness of tire companies to costs - consumers who choose the brand products of leading tire companies are more likely to pay for value.

Price increases can help offset this. Even Michelin's operating profit for truck and bus tires increased by +26.1% year-on-year through high-end fleet services in 2024.

Therefore, for leading tire companies, the increase in raw material costs is a headache, but it doesn't seem to be that much of a headache.

In fact, in 2022, when costs rose the most violently, Michelin's operating profit margin was still able to remain at around 12%.

However, the same situation is very different for many tire companies that rely on high quality-price ratio to grab market share. Their main consumers pay more attention to prices, which leads to the meaning of "digging their own graves" by increasing profits by raising prices. If prices are really raised to protect profits, sales may end up being ruined.

In addition to the different impacts of rising raw material costs on different companies, changes in basic costs such as transportation costs also vary from company to company. The leading enterprises are affected but the degree of impact is not high. However, for the third and fourth echelon tire companies, any cost increase is a fatal threat.

Labor cost increases, tire companies are affected in the same way

If we look back, we can find that since 2022, tire companies, especially foreign-funded tire companies, have begun to talk about the impact of labor costs on corporate profits.

Looking through the labor cost expenditures of leading tire companies in the past five years, it can be found that it has been rising year by year. The average annual growth rate of labor costs of foreign-funded tire companies in the past four years is 6%.

In 2024, the labor cost investment was nearly 20% higher than that in 2019. In the past three years, the proportion of labor costs in sales has basically been between 25% and 30%. In domestic tire companies, the labor cost investment in 2022 and 2023 increased by 4% and 10% respectively.

The proportion of its employee salaries in total costs has always been around 20%. However, in terms of labor output value, the per capita output value of foreign capital is declining at a rate of 1% to 2%.

At the same time, strikes and wage increases in South America and Europe are also increasing the operating pressure of tire companies. As Chinese tire companies begin to gradually expand their production capacity to North America and Europe, the same challenges are also coming.

Of course, the risks of building factories overseas are not only the unexpected increase in labor costs, but also the more terrible exchange rate pressure.

Exchange rate fluctuations, tire companies have no investment in South America

In 2023, due to the increase in overseas exports, Chinese tire companies also began to frequently mention the impact of exchange rate changes on revenue.

Public data shows that the exchange rate fluctuations in Brazil and Chile in South America and Turkey in Asia in 2024 will be 7.4%, 12.6% and 42.5% respectively. The "roller coaster" exchange rate changes can be said to be the most uncontrollable cost variable for tire companies.

Therefore, as of now, the leading tire companies have added capacity in Europe, North America and Asia, but South America has not taken any action. In fact, not only foreign-funded leading companies have no action, but Chinese tire companies that like to deploy tire production capacity in relatively low-cost areas also seem to have no investment plans.

The high volatility exchange rate risk in South America may directly bring devastating damage to the revenue and profits of tire companies. Therefore, most tire companies only plan channels here, but rarely consider capacity investment.