Nexen Tire Corp. (002350), the South Korean tiremaker that’s expanded revenue every year since the turn of the century, plans to further increase its profitability by raising prices as global rubber prices plummet.
The nation’s third-biggest tire producer outperformed larger makers in the latest reporting period, with second-quarter net income rising 43 percent compared with a 25 percent drop for Hankook Tire Co. (161390) and a 2 percent gain at Kumho Tire Co. (073240) Growth was driven by lower raw material costs and increased sales of the more-expensive ultra-high performance tires for sport-utility vehicles, said Lee Jang Hwan, a director at Nexen’s global marketing division.
“Our tire prices will continue to increase slightly regardless of the falling rubber cost,” Lee said in an interview in Seoul, declining to give further details. “The company will continue to show strong profits in the third and fourth quarter.”
While Nexen’s Korean clients Hyundai Motor Co. (005380) and Kia Motors Corp. (000270) have shifted manufacturing overseas to escape a stronger won that has hurt exports, the tiremaker is focusing on higher margin products and cutting costs through automation to weather the currency movements. About 75 percent of Nexen tires are produced in its home market, which accounted for 27 percent of revenue last year, data compiled by Bloomberg show.
“A stronger won undoubtedly has an adverse impact on our business,” Lee, 51, said Oct. 7. The company offset this by boosting output at a new factory in Changnyeong county that’s more automated than its other plants in South Korea, he said.
It plans to produce 21 million units at the 1.5 trillion-won ($1.4 billion) factory when the final phase is completed in 2018, or about 35 percent of Nexen’s estimated output at that time, according to data from the company. Nexen produced Korea’s first vehicle tire in 1956, the company says on its website.
“Tiremakers don’t necessarily have to lower prices because the cost of making a tire fell,” Shin Chung Kwan, an analyst at KB Investment & Securities Co. in Seoul, said by phone. “Consumers usually buy tires out of need and safety concerns, not because a product is cheaper.”
Rubber futures in Tokyo have plunged more than 30 percent this year through yesterday, on weakening demand in China, the biggest consumer, and Europe. The won was the best performer among 11 Asian currencies tracked by Bloomberg in the second quarter.
Net income at Nexen, whose clients include Volkswagen AG and Fiat SpA, will probably rise 11 percent to 136 billion won this year, according to the average of 17 analyst estimates compiled by Bloomberg.
The company, which changed its name from Woosung Tire in 2000, has released 11 new products since 2013, including six models for SUVs and two for winter usage.
Nexen plans to invest 1.2 trillion won to build a factory in the Czech Republic, its second overseas plant after one in Qingdao, China, opened in 2007.
The Czech factory may help Nexen gain new customers, luxury carmakers such as Bayerische Motoren Werke AG, Daimler AG’s Mercedes Benz and Volkswagen’s Porsche, Lee said.
Nexen currently exports tires from South Korea to supply Chrysler Group LLC, Hyundai and Kia in the U.S. The tiremaker would consider building a plant in the U.S. or Mexico if demand increases, he said.