Tyre industry left threadbare

IMPORTS now command the majority of the South African car tyre market, causing inevitable downsizing in the industry and the loss of thousands of jobs.

But if the tyre industry wins a case currently before the Supreme Court, it could create a legal precedent that would give it — and all other South African industries — a better chance of success in applying for anti-dumping action against cheap Chinese imports.

The case could prove to be the acid test for government’s commitment to job creation and the manufacturing industry over its relationship with China – especially now that South Africa is a member of the Brazil, Russia, India, China (Brics) alliance.

South African tyre-makers complain that the strong rand is not the primary problem; it is dumping by China. They are relatively unconcerned by competition from tyres imported from other low-cost Asian countries such as India, Malaysia and Thailand, but they say the International Trade Administration Commission of South Africa (Itac) investigation into their dumping application against China was poorly handled and may have been negatively influenced by the cosy politics between South Africa and China.

The South African tyre industry employs about 6 000 workers between four manufacturers, all foreign-owned multinationals: Apollo (formally Dunlop), Bridgestone, Continental Tyre and Goodyear.

Etienne Human, the chief executive of the South African Tyre Manufacturers Conference (SATMC), which represents all four, says the strong rand, inflation in labour costs and low productivity are other factors undermining the local industry.

Imported raw materials account for about 45% of tyre production costs, so although a weaker rand would make imports more expensive, it would also make local production more expensive.

Other industries facing destruction as a result of competition from low-priced imports from China include textiles and clothing (which has struggled against imports for many years), but more recently, the windscreen industry and many metal based and fabrication industries such as steel and copper cables, pipes and aluminium extrusion have also felt the pinch.

Imports from China
In 2003, total passenger vehicle tyre imports into South Africa, according to South African Revenue Service (Sars) figures, were 1.638-million, of which only 35 000 came from China. But by 2010, the number had more than doubled to 3.869-million, of which 1.685-million came from China. The main market is for replacement tyres. With a “park” of about 6.3-million passenger vehicles in the country and a replacement rate of about 1.1 tyres a vehicle a year, the total annual replacement market is probably about seven million tyres.

Car-makers are a smaller, secondary market for local tyre-makers — about 300 000 vehicles a year in the good times, perhaps half that when times are tough. Also, car-makers demand low tyre prices. Another problem is that close to 70% of passenger vehicles are now imported fully built, including tyres.

South African tyre-makers benefit little from the rich vein of subsidies that sustain the domestic car-making industry, except insofar as they export tyres fitted to new cars (and thereby gain rebates).

The duty on car tyre imports is generally 30%, but it varies according to trade agreements. According to Sars import statistics, in 2010, the average price (taking into account all sizes and types) of non-Chinese imports was R459 a tyre, but the average price of tyres from China was R175. These prices do not include import duties. The comparable figure in 2003 was R225 a tyre for non-Chinese imports and R108 for tyres from China.

Human says the average price for South African-made tyres is unavailable because the local industry is the subject of an incomplete Competition Commission probe into price collusion. Of total imports, about 20% are made by local manufacturers, which import certain sizes to allow for more economical local production runs in more popular sizes.

In 2005, the SATMC, alarmed by rising cheap imports from China, brought an anti-dumping application to Itac. The trade commission took two years to produce a report, compared with the year required by regulations, according to the SATMC.

Lower cost
The SATMC alleged that there was Chinese government participation in tyre-makers, providing subsidisation and highly concessionary loans, and that the prices for Chinese exports were lower than domestic prices and often below international rubber and labour costs alone. The SATMC alleged that in some cases dumping margins were up 1 000%, in other words, tyres were being exported at a small fraction of their cost.

Human says the Chinese motivation for exporting cheaply is that it has 70% to 80% production overcapacity compared with its domestic market, production that must be sold off, and new factories are still being built. Also, he believes that in some Chinese sectors the strategy is to weaken local manufacturers to create space to expand exports further and South Africa is an important market, particularly as it is a stepping stone into the rest of Africa.

Itac’s report, produced in 2007, accepted that the South African industry was suffering harm and that there was dumping by some relatively small Chinese manufacturers, but it exonerated a number of big Chinese manufacturers and recommended that the investigation be terminated without action by the minister of trade and industry. The SATMC took the commission’s report on appeal.

It complained that the Itac investigating team visited China and accepted the figures given to it by Chinese manufacturers with little further inquiry or the compilation of proper audit reports. It says the commission has shown a “totally unsympathetic attitude” towards South African manufacturers.

In June 2010, Judge Willie Hartzenberg of the Supreme Court of Appeal in found for the SATMC and ordered that the commission redo the anti-dumping investigation within four months, using prices from a third country. He inferred that China might not be a market economy.

But the commission took Hartzenberg’s judgment on appeal to the Supreme Court in Bloemfontein and the last hearing of that appeal is to be held on September 7, about six years after the original application.

In the best scenario for local tyre makers, the court could only refer the matter back to the commission for a report on the situation in 2005-2007.

Human says representation to Itac and legal action has cost the industry about R3.5-million so far. He says that, by contrast, an anti-dumping duty against China in the United States took 15 months to implement and a 35% tariff was imposed. Anti-dumping action has also been implemented by Brazil and Turkey. He questions why millions of rands and thousands of hours over many years have had to be spent by South Africans simply to try to level the playing field.

Dumping case may puncture trade relations
The tyre industry anti-dumping court case, now before the Supreme Court of Appeal, may have the effect of reversing the South African government’s decision to recognise China as a “market economy”, something many in industry think is a fiction.

If the Supreme Court requires the International Trade Administration Commission (Itac) to ignore the South African government’s decision, President Jacob Zuma may have to choose between his relationship with China and the need to assist South African industry as it faces increasing competition from cheap Chinese imports.

In 2004, the government announced that it was granting China “market economy” status (although the memorandum on this was signed only in 2006). Following this, there was a radical change in the way the calculation of “the margin of dumping” was done by Itac in anti-dumping cases.

This has meant that Itac, unlike in the past, may no longer disregard the domestic prices of manufacturers in China and replace them with prices from another country. In the past, Indian, Taiwanese and United States prices, for instance, were often used in deciding anti-dumping cases against China. “This has, in general, caused the margins of dumping … to be lower”, said Itac, which means that it has become far more difficult to bring about successful anti-dumping applications.

Itac said, in spite of this change, in many instances, it has found positive dumping margins in its investigation of Chinese manufacturers and has recommended the imposition of anti-dumping duties.

As of end-June 2011, there were about 33 anti-dumping duties in force in South Africa, about 13 of them against goods from China.

On the tyre industry case, Carina van Vuuren, Itac’s senior manager, trade remedies, said it is appealing the initial judgment by Judge Willie Hartzenberg because it believed that Itac should not have been required by the court to use prices from a third country.

Van Vuuren also said that, unlike its predecessor (the Board on Tariffs and Trade), Itac operates under detailed regulations exacting procedural requirements.

“While the BTT typically imposed anti-dumping duties, in particular against China, the methodologies [under which it operated] have been modified, resulting in comparatively fewer duties being imposed against imported products.”

Chinese trade authorities are reportedly aware of the tyre case and are placing pressure on government to find ways to nullify the Supreme Court of Appeal ruling if the industry is successful.