Tired out

Wheel of bad fortune: Kumho

In the 1999 movie Fight Club, the lead character has the macabre job of calculating whether the expense of a recall for faulty vehicles is likely to outweigh the potential cost of future lawsuits. Similarly grim accusations were levelled at South Korea’s Kumho Tire earlier this month, after a CCTV investigation claimed that tyres from the company’s Tianjin plant have been made with too much recycled rubber, and were prone to early failure. The claims featured prominently on a CCTV show that airs in mid-March each year, on World Consumer Rights Day.

Kumho initially denied the reports, but then changed its stance after an internal investigation. China boss Lee Han-seop apologised on national television and said that those responsible had been sacked. “We have decided to call back all the faulty tyres made by the factory,” Lee told CCTV. “We also pledge to deal with customer complaints regarding tyre quality in a timely manner.”

How far the recall will go, and whether it will be enough to salvage Kumho’s image, remains to be seen. But the Economic Observer argues that the problem wasn’t an isolated one, with complaints about Kumho focusing on early wear and tear in the tyres in question, as well as cases of deeper product failure.

The 10 million-tyre a year Tianjin plant has now had its operating licence suspended and is out of action, but two other plants in Nanjing and one in Changchun are operational.

Kumho is now looking to recover in a market in which it gets roughly a quarter of its global sales, and where it has also built up a 23% market share since starting up in 1994.

“During the slump in the global auto industry in 2009, China became the only growth point for major foreign tyre companies,” explains EO. “Foreign firms now have at least 70% of the market for tyres used in passenger cars.”

Kumho’s previous edge: it was seen as a reliable brand, but cheaper than the likes of Michelin and Goodyear. It helped also that the firm had built capacity early enough to cope with the boom in car sales that has followed. “Over the last two years, demand for cars has outstripped the supply,” an industry executive told the magazine, “so manufacturers naturally wanted to work with large scale firms.”

But increasing competition, and the rising cost of core inputs like steel and rubber, have put pressure on tyremakers. That may have been part of what motivated the Kumho executives to cut corners in Tianjin.

We wrote last week about the knock-on effects to China’s supply chain caused by the recent earthquake in Japan. But the effect on the auto industry of a consumer backlash against market leader Kumho could also be complicated. Carmakers that have relied previously on the Korean firm – including Shanghai GM, Beijing Hyundai and Shanghai Volkswagen – will have to scramble for alternative tyres in the quantities that they need.

The Kumho case may also make it tougher for China’s “retread” market to get further traction. We wrote in WiC82 that tyres with recycled content were being sold in greater volume, although many drivers were still hesitant because of safety concerns.

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