In recent months, the tire industry has experienced a surge in production, with many companies operating at full capacity and several new projects coming online. However, data from 44 member companies of the China Rubber Industry Association Tire Branch reveals that from January to March this year, finished goods inventory increased by 4.5% year-on-year, with domestic enterprises seeing a rise of 14.9%. Shen Jinrong, chairman of the Tire Division of the China Rubber Association, warned that this trend may signal an overinflated market. "The price of natural rubber this year is around 13,000 yuan, compared to about 26,000 yuan last year, which means the cost gap for finished products is nearly 20%," he explained. "This increase in inventory is significant, and what appears as a thriving scene could actually be 'puffiness.' Rising inventories and shrinking profits are early signs of potential issues in the capital chain, and we need to remain vigilant."
Shen noted that he initially expected inventory levels to decrease, but the latest report showed a sharp increase. He was particularly surprised to see that major taxpayers’ profits had dropped significantly. "In China’s statistics, finished product inventory is calculated based on cost, including raw materials and manufacturing costs, but it's not easy to digest inventory based on physical quantity alone," he said. "With raw material prices falling, 100 million in liquidity can now produce 7 billion tires instead of just 5 billion. Companies today can afford more inventory than before the financial crisis, but the market demand is still based on the number of tires needed per car, not their value. A car doesn’t use five tires just because materials are cheaper."
"If finished products aren't sold, there’s no way to generate revenue," Shen added. "Large inventories tie up company liquidity, slowing down cash flow. If companies can’t pay for raw materials, they won’t be able to operate. Combined with the relatively low capital mobility of Chinese companies, this has created serious challenges in managing inventory, which is a major issue."
According to Shen, the main causes behind the inventory buildup include excessive liquidity, making it easier for companies to access loans and financing, and overly optimistic expectations about market conditions. "Many companies are chasing high production rates regardless of actual demand, leading to high inventory levels," he said.
Cao Chaoyang, chairman of Aeolus Tyre Co., pointed out that the U.S. investigation into special protection measures for Chinese consumer tires highlights a deteriorating international trade environment. With declining exports, domestic demand alone cannot fill the gap, further complicating the situation for tire companies.
Globally, the IMF has lowered its economic growth forecasts for both developed countries and China. Developed economies are expected to contract by 3% to 3.5%, while China’s growth is projected to slow to 6.5%. Meanwhile, global tire giants like Chrysler and Michelin have also expressed concerns about the outlook for the tire industry.
Domestically, the first quarter saw a record amount of new currency loans—4.58 trillion yuan—which exceeded all previous years combined. Premier Wen Jiabao’s work report outlined plans for 5 trillion yuan in new loans this year, with 90% already disbursed in the first three months. This rapid expansion of liquidity raises questions about whether the later stages will keep up. The sharp increase in money supply, along with large-scale infrastructure projects, suggests a possible surplus of funds.
Additionally, related industries such as steel are facing overcapacity. In 2008, steel output reached 500 million tons, with 10% exported. This year, production is expected to drop to between 430 million and 460 million tons. This indicates that investments in tire-related sectors like mining and automotive may not be enough to compensate for the loss of foreign markets.
Internationally, the situation is worsening. At the end of April, the U.S. launched a special safeguard investigation into Chinese consumer tires, which account for 75% of total exports and 88% of tire exports. As the largest export destination for Chinese tires, the U.S. accounts for 37% of total exports. If special safeguards are imposed, China’s tire exports could fall by approximately 6%. More concerning is the possibility that other WTO members might follow suit, potentially causing a much larger drop in exports—nearly 45% of China’s tires are exported. Filling this gap is a huge challenge.
Tan Yukun, deputy secretary-general of the China Rubber Association’s Tire Division, urged caution against new overheating and blind investment. He emphasized that while expanding investment can stimulate domestic demand and support exports, it must be done carefully. "The global economic crisis is an external factor, but the key issue remains supply exceeding demand," he said. "Without proper domestic and export demand, expanding investment carries significant risks." He called on companies to avoid redundant construction and ensure sustainable development.
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