FRANKFURT (Bloomberg) -- Continental AG and Michelin, Europe's two largest tiremakers, are accelerating an expansion in Russia to tap growth while avoiding import restrictions.
Continental will decide on building plants in Russia and India before the year is out, Nikolai Setzer, head of the car- tire division, said in an interview. Michelin CEO Michel Rollier told reporters that the French manufacturer will have to expand its Russian facility because of high import costs.
Russia imposed 20 percent tariffs on imported tires while India, much like China, is trying to protect local suppliers by requiring foreign companies to certify their products through complex procedures, Setzer said. Italy's Pirelli & C. SpA is also in talks to expand its presence and buy plants in Russia, Prime Minister Silvio Berlusconi said last month.
“It's obvious that we need to have local production in Russia if we want to be a strong player there,” Setzer said. ‘We're still evaluating different concepts and ideas, but we do want to have a decision this year.”
A decline in car sales in Russia has slowed this year, and deliveries may rebound by as much as 15 percent to 1.6 million vehicles after plummeting 56 percent in 2009, consulting company PricewaterhouseCoopers said in January. Indian vehicle sales increased at the fastest pace in six years in March, according to Society of Indian Automobile Manufacturers figures.
Continental, which is also Europe's second-biggest vehicle-parts maker behind Robert Bosch GmbH, predicts large growth potential for the Russian and Indian tire markets and wants to avoid the cost of shipping from its plants in Europe and Malaysia, Setzer said. The company, which is based in Hanover, Germany, says Asia and Russia are its key growth markets as it tries to reduce 8.2 billion euros ($10.4 billion) in debt.
Setzer declined to comment on investment or production targets.
Continental already has a joint venture to make and market car tires in Omsk, Russia, with OAO Sibur-Russian Tires, a unit of petrochemical company OAO Sibur Holding. In India, the company works with JK Tyre & Industries Ltd. and Modi Tyres Co. to research new products and adapt Continental's technology to the local market.
An increase in prices of natural rubber and oil has reversed a 250 million-euro gain from lower supply costs in 2009 at the division, Setzer said. It's difficult to raise tire prices at the same rate that expenses increase, he added.
Rubber price rise hurting
The price of natural rubber is 47 percent higher than a year ago, while crude oil has risen 39 percent from May 2009.
“It's already hurting us,” Setzer said. “Even if raw- material prices plummeted right now, we'd have significant costs this year.”
Natural-rubber prices probably won't decline before June or July, and any drop would take three to six months to have an effect on production costs, he said.
Continental is raising car-tire prices by as much as 5 percent in Europe on June 1 and is planning a second increase of as much as 6 percent in North America in mid-2010, Setzer said. The company may add to price increases it has already imposed in some Asian markets, he added.
Michelin, the world's second-largest tiremaker, also said it will raise prices in a bid to defend margins against higher rubber and oil costs.
“Our objective is to compensate for raw-material cost increases by raising prices,” CEO Rollier said after a shareholders meeting near Michelin's headquarters in Clermont- Ferrand, France. “We're confident we will achieve that.”
Michelin will use a “very reactive pricing policy” to offset increased spending on rubber, oil and steel, Managing Partner Jean-Dominique Senard said at the meeting, without elaborating on the scale of any price moves.
Michelin said in November that it will double capacity for making car tires in Davydovo, near Moscow, and build a factory to serve Russia's truck-tire market, Europe's largest.