Why the world “budget” tyre market may be considered to be more-or-less perfectly competitive
The world “budget” tyre market is becoming more competitive, but cannot be declared more or less perfectly competitive, owing to the challenges it poses to the tyre market in general. It also has some advantages as it offers low-priced tyres; thus it is a two-way traffic with advantages and disadvantages.
The tyre market has been influenced by the Americans and Europeans over the years, and any economic slowdown in their continents affected many countries. The economic crisis in the US and Europe affected the global tyre industry through curtailing exports, increasing import costs, and lowering the demand for tyres. What followed was the production of cheap tyres (budget tyres) in the Far East (Rubber Asia, 2009).
Many tyre companies have now shifted gears to the production of budget tyres. These tyres are cheap, but do not match those produced in the US and Europe, in terms of quality and noise reduction. There is a Chinese tyre overcapacity, which now hinders the healthy development of the tyre manufacturing sector in the globe.
The Chinese tyre enterprise has been favoured by the advantages in price, little reliance on research and technology, as well as little attention on the brand. The US and Europe emphasize on the brand, and there is unhealthy competition in the tyre market. This has worked to the disadvantage of the tyre producers placed in the international high-end market.
The impact on profits in the period of the rise in budget tyre prices
The budget tyre prices rose as tyre production in America and Europe decreased. European and American tyre firms lost grounds in tyre manufacture, leading to a decrease in production, at a time when the demand for tyres was high. The Chinese took hold of the opportunity and began mass production of budget tyres.
They made a lot of sales through high supplies to meet the high demand of countries in Europe and America, as well as other places. This led to high profits for tyre firms in China, and good revenue for the government.
The profits were ploughed back into business, and firms expanded their production. This would make China the leading producer of budget tyres in the world, later. With the expansion of tyre firms, came the demand for more supply of the tyres in the world.
These tyres are cheap compared to the European and American brands. Thus, China continues to supply the rest of the world with budget tyres. Specifically, these tyres have gained prominence in African markets, as the Third World countries prefer importing the low-priced tyres, as compared to the expensive European and American brands. Nowadays, China is a principal exporter of tyres to different countries in Africa.
The following diagrams explain how the market and individual demand changed in respect to changes in prices as well as the profits of the market and industry:
Since the market is almost perfectly competitive, the rise in budget tyre prices caused an increase in total costs hence influencing the tyre industry’s profitability as illustrated in the following graph:
Why Chinese tyre producers expanded their production capacity and new firms set up
The economic difficulties of Europe provided a boost for the budget tyre market. The rise in unemployment, shrinking of disposable incomes, and the rise in cost of motoring have led to the progressive trend in the rise of budget tyre market.
The rising labour costs in China, coupled with the weak currencies and increasing competitiveness in Europe and North America caused a long-term decline in the manufacturing sector (Goldston, 1968). This forced some of the tyre producing firms to venture into the Chinese markets. With the high export momentum and a significant rise in wages, productivity has improved tremendously in China.
This has made new tyre firms open up business in China. Furthermore, the tyre anti-dumping duties in USA are not as good as they appear on paper, but are a tremendous challenge to the expansion of tyre businesses. The US tyre and other manufacturers have a long way to go before they can actively compete with the Chinese producers.
Why non-Chinese firms cut back their production when tyre prices began to fall in response to the economic downturn
The Recession of 1937-1938 took place during the United States’ Great Depression (Roose, 1948). It affected many companies especially in Europe and America, with little effects being felt in Asia and other continents.
It occurred at a time when Europe was also facing a debt crisis. Industrial production in non-Chinese companies fell by about 30%, and those producing durable goods such as car tyres, bore the biggest brunt of the Recession. The economic slump down caused by the recession created a decrease in demand for tires.
The debt crisis forced tyre companies to cut down production by 15% in Europe. Consequently, the tyre industry grew steadily in Asia, expanding the market in China. Moreover, the global financial crisis of 2007-2012, which began in the US with subprime mortgage crisis, has adversely affected tyre production in non-Chinese firms.
Europe for instance, requires tyre labelling since 2012, and this has posed numerous challenges to tyre manufacturers. The labelling requires new manufacturers to provide data regarding noise or rolling resistance for tyres to retailers. Sometimes, it is hard to convince retailers to buy and manufacturers spend a lot of time convincing the buyers.
Since the industry is perfectly competitive, the following graph illustrates what happened when the market prices started to fall:
References
Davis, B. (2003). Bridgestone buying share in Nokian Tyres.Tire Business, 12 (2), 6- 12.
Goldston,R. (1968).The Great Depression: The United States in the Thirties, New York: Fawcett Publications.
Mining Magazine. (2012). Getting a Grip. Web.
Roose, K. D. (1948). The Recession of 1937-38. Journal of Political Economy56, (3)239–248.
Rubber Asia (2009). Slowdown Impacts Tyre Industry Output. Web.