Turning to Deficit
Kumho Tire Co. saw its operating profit turn towards the red in the first quarter this year due to growing concerns over a fall in the brand value as the company is likely to be acquired by a Chinese investor. The nation’s second-biggest tiremaker is suffering from “China Discount” even before its sale to Doublestar.
According to Kumho Tire on May 15, the company posted 669.3 billion won (US$596.52 million) in sales and 28.2 billion won (US$25.13 million) in operating profits in the first quarter this year. The sales figure fell 4.6 percent compared to the same period a year earlier. Its domestic sales increased 11.7 percent on-year, while overseas sales decreased 10.9 percent. Since overseas sales accounted for 65 percent of its total sales, sluggish sales overseas adversely affected the company’s overall performance.
Kumho Tire recorded an operating loss for the first time in six quarters after the third quarter of 2015. The company showed continuous growth in the domestic market with its aggressive business activities, though the competition heated up. However, both its sales and profitability declined due to lower demand from the major overseas markets such as North America and Europe, sharp decline in tire sales in China amid a retaliation over the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) system and increase in raw material prices.
In addition, they were most affected by concerns over a possible decrease in its brand image when Doublestar, the world's 34th largest tiremaker by sales, acquires Kumho Tire, the world’s 14th largest. Large dealers overseas are decreasing their purchases because they expect that selling prices will be lowered if Kumho Tire is acquired by the Chinese company. They are also cutting down bulk purchases since they expect to have difficulties in dealing with inventories when Doublestar cannot use the trademark rights of Kumho Tire brand.
In fact, Kumho Tire’s large dealer in the U.S. stopped placing an addition order after Doublestar informed that it will take over Kumho Tire soon and suggested the business meeting in February. The dealer currently reexamines the business deals with Kumho Tire.
Another problem is that Kumho Tire fails to raise the price of products, though the price of natural rubber surged by more than 10 percent compared to the end of last year. The company cannot even think about increasing the price at the moment when its dealers are reducing their purchases. Accordingly, it is suffering from the double torture of the decrease in both revenues and profitability.
Currently, Kumho Tire is in the emergency management as the company is struggling to maintain existing orders as well as new orders due to a growing possibility of its sale to China. It has decided to expand supplies of original equipment (OE) tires produced in its plant in Georgia, the U.S., and find new dealers. It also plans to expand sales of high performance and high inch tires in China and Europe.
In addition, Kumho Tire will advance the period of production stabilization at the Nanjing plant in China, which is relocated, and accelerate the sales expansion with the launch of new high inch products and special promotions in North America and Europe. The company will also cut down enterprise-wide costs.
However, industry sources say that Kumho Tire should reconsider the sale to Doublestar in order to diversify business relations and expand sales. There is an overriding prediction that the company will not be able to expand its supplies and sales unless it dispels rumors about the sale to China as the rumors drove down its sales and profitability.