Viet Nam, with higher demand for cars, will need 6 billion tires each year  by 2020.--VNS file photo

HA NOI (BizHub) — The sharp decline in world rubber prices is expected to benefit local tire producers but stronger competition from foreign firms presents a challenge.

On the Shanghai trading floor, the price of rubber delivered in April was reduced by 11 to 13 per cent, while May delivery prices stayed at CNY19,723 ($3,215) yuan per tonne, down CNY3,187 ($519) per tonne from the previous month. On the TOCOM trading floor in Tokyo, the price of rubber also fell by over 8% compared with March. Together with the downtrend in world prices, local prices for natural rubber reduced sharply by 7 to 9 per cent.

In the first quarter, though the net income of the industry recorded a reduction of 9.35 per cent on average due to the downturn in the world economy in general and the automotive industry in particular, local makers still benefited from the lower raw material prices. Their costs were reduced by 17 per cent on average. Among the biggest local makers, Sao Vang Rubber Joint Stock Company (SRC) recorded the most impressive cost reduction of 27.5 per cent for its tire production.

Gross profit of the listed tire makers, Southern Rubber Industry Joint Stock Company and Da Nang Rubber Joint Stock Company, all increased compared with the first quarter during the previous year, registering an average of 28 per cent growth.

In last year's Q3, most tire makers also reported higher profits due to lower rubber prices.

Competition, technology and management need to improve

High demand for cars and better transport facilities are making Viet Nam a more attractive market for investors in the rubber sector. According to Ford's predictions, Viet Nam will see increasing demand for rubber and need 6 billion tires each year for cars by 2020.

Le Van Tri, deputy general director of Casumina, said they faced fiercer competition from foreign businesses. He said most famous international brands can be found in the local market, including Japanese firm Bridgestone whose factory will go into operation next year in the northern port city of Hai Phong, as well as Michelin, Yokohama, Cheng Shin, Kumho and Velocee.

Local firms such as Tay Do, Dai Thanh Cong, Hai Thanh, Saigon, Viet Phat, and foreign makers such as Kenda, Shinfa and Inoue are also competing against each other for market share.

Though some may gain from the price reduction, it's not a big advantage if the businesses do not tighten their operating costs at the same time. SRC provides a good example for applying the cost reduction in both administrative work as well as sales operations. As a result, SRC achieved Q1 net profits that doubled the figure for the same period in the previous year, while its gross margin during the period was only slightly higher than the same period in 2012.

In terms of technology, while most of the foreign firms produce their tires with the latest technology from the US and Europe, local tire makers use Chinese technology for their production, which leaves them in a weaker position than their foreign competition.

In such a competitive context, the Vietnam Rubber Association urged local rubber companies to make further cuts in production costs, make us of savings in raw materials and improve their technology to maintain leadership in the market.--VNS