Nokian Tyres flips focus after riding out Russia’s ruble rout
VSEVOLOZHSK/HELSINKI (Reuters) – Nokian Tyres, which supported earnings during Russia’s ruble crisis by boosting exports from the country, is flipping strategy as the economy rebounds.
The Finnish firm, which makes most of its tires in Russia, is now expanding production there to supply the local market while cutting exports. It also plans to open a factory in the United States that will further reduce the need for Russian supplies to go overseas.
The tire maker’s flexible strategy could offer some guide to other companies and investors operating in Russia’s notoriously volatile and unpredictable market.
Yet there are risks ahead. A limited scope to further expand production and rising raw-material costs could undermine Nokian’s ability to adapt to economic and industry shifts, while competition is heating up in the premium winter-tires market it specializes in.
During Russia’s 2014-16 economic crisis, Nokian hiked exports to account for 70% of all tires its produced in the country, up from about 55% before, as manufacturing costs effectively tumbled along with the value of the ruble.
Now, though, economic growth and a stronger currency are fueling a recovery in the Russian auto market, and new-car sales are rising in 2017 after four years of decline.
Nokian has responded by redirecting export volumes to local customers. It is also spending €55 million ($64m.) on upgrades to its Russian factory this year, including a new production line that will lift annual capacity to 17 million tires by the end of the year.
“We assume a sustained growth in the market in Russia in the coming two to three years,” Nokian executive vice president Andrei Pantioukhov told Reuters. “Judging by this, the share of local sales in our production at this factory will increase.”
Nokian, which has two plants, in Russia and Finland, also plans to start US production by 2020 by building a $360m. factory in Tennessee. This will free up tire volumes to remain in Russia, Pantioukhov said in an interview at the company’s Russian factory in Vsevolozhsk, near St. Petersburg.
The scale of the switch was shown in results published last week. Sales in Russia and the CIS rose 86% in the first nine months of 2017 and accounted for 21% of group sales, up from 14% a year before.
The company declined to disclose export volumes, but it said they had fallen and now represented 66% of Russian production.
The tactic is showing early promise. Nokian reported a better-than-expected 21% rise in third-quarter profits to €90m., driven by Russia and a stronger ruble, after raising its full-year earnings forecast in August.
However, it said it expected total costs for raw materials – natural rubber, synthetic rubber, carbon black and oil – to rise 20% this year.
TIRES, TOBACCO, VODKA
The Finnish firm, which makes 86% of its tires over the border in Russia to capitalize on lower energy costs, weathered Russia’s economic crisis better than many other foreign companies.
Its export drive made it Russia’s largest exporter of consumer goods, in a market traditionally dominated by tobacco and vodka, and delivered healthy profits in the downturn, which cemented its position as the country’s top tire producer.
Nokian’s ability to weather the slump better than many in the auto industry was helped by having the bulk of its manufacturing in Russia, while many other companies, including carmakers, rely on imported components.
General Motors, for example, wound up production in Russia in 2015, while Renault slashed the value of its majority stake in top Russian carmaker Avtovaz.
Nokian’s strategy is not a unique one, however.
Some other manufacturers, including steelmakers and certain meat producers, have adopted the same adjustable strategy during and after the downturn, with varying degrees of success.
Among tire makers, Germany’s Continental and Italy’s Pirelli also used exports from Russia to support earnings during the crisis years.
Continental’s 2015 Russian exports accounted for 19% of annual production, which it bumped up to 30% by 2016. “The emphasis on sales exclusively on the Russian market turned out to be incompatible with changing realities,” a Continental spokeswoman told Reuters. It then cut exports back to the current level of 13% as the economy recovered.
But Nokian was better positioned than its competitors to capitalize on the opportunity thanks to the location of its factory in Vsevolozhsk, which was planned as a hub for both local and foreign sales when it was built in 2005, well ahead of many of its rivals.
Continental’s factory in Kaluga and Pirelli’s plants in Kirov and Voronezh are all hundreds of kilometers from the nearest port and were not opened until the early 2010s.
“The Nokian factory is very well placed logistically. Near St. Petersburg, volumes are very easily redirected as exports through the port,” VTB analyst Vladimir Bespalov said. “If your factories are in the depths of Russia, then logistics costs mean there are fewer opportunities for exports.”
RISKS ON ROAD AHEAD
Nokian faces some potential potholes though.
The company has long been at its strongest in Russia and the Nordic nations. But stiffening competition from the likes of South Korea’s Hankook in studded winter tires could increasingly pressure Nokian’s position as a technology leader in some of those markets, analysts say.
Pantioukhov, the executive vice president, declined to give precise production figures. But he said the Vsevolozhsk factory, which can currently produce up to 15.5 million tires a year, was “practically running at full capacity.”
Nokian CEO Hille Korhonen told investors last week there would be no space left in the plant to add more capacity after the new production line was completed. She also said the rising raw-material costs would lead to a financial hit of about €60m. this year.
Petri Kajaani, an analyst at Inderes, which rates Nokian shares as “accumulate,” said the company’s capacity restraints could limit its ability to increase sales before the US plant starts ramping up. Any price hikes on the back of higher material costs could damage the product’s appeal to Russia’s cost-conscious consumers, he said.
“Although car sales are rising in Russia, consumers’ purchasing power is still weak,” Kajaani said. “If the upward trend in raw-material costs continues, Nokian’s margins will be pressured.”