For the average car driver, tires are pretty much all the same, and replacing worn rubber is a matter of relying on recommendations from a repair shop. That’s changing in Europe as new rules help consumers decide whether higher-priced Michelins (ML) are worth it.
Starting this month, car tires in the European Union have to bear labels that rate their impact on fuel efficiency and their traction on wet roads on an A-to-G scale, with A being the highest. The noise generated while driving is given in decibels, as part of an effort to help consumers distinguish between tires that can vary in price from about 45 euros ($57) to more than 200 euros for the same-sized model.
The labels show consumers that tires are “not only round and black,” said Marco Tronchetti Provera, the chairman of Italian tire-maker Pirelli & C SpA. (PC) “The perception of the value of the tires improves.”
Differentiation is crucial for European tire-makers like Michelin & Cie., Continental AG (CON) and Pirelli as low-cost Asian manufacturers step up competition to woo away customers in the region’s stagnant market. Austerity measures stemming from the sovereign-debt crisis heighten the allure of budget tires.
The share of Chinese, Korean and other non-European brands in the region’s 47 billion-euro tire market rose to a record 23 percent last year from 20 percent in 2007, according to the European Tyre and Rubber Manufacturers’ Association, or ETRMA.
“Labeling’s a game changer” for the tire industry, said Fazilet Cinaralp, the ETRMA trade group’s secretary general. “The competition will be even fiercer. The major brands will face big challenges” to justify higher prices.
The U.S. will issue a final rule next year requiring tires sold in the country to be labeled for fuel efficiency, wet traction and treadwear, said Gene Petersen, who runs Consumer Reports’s tire testing operation.
“Of course, this rating system is different from the EU system,” he said. “Japan, Korea and Brazil have requirements out or out soon for fuel efficiency.”
Current European ratings show that high-end manufacturers in some cases are running behind their low-cost rivals. Tires for a Volkswagen Golf hatchback from Taiwan’s Nankang Rubber Tire Corp. are rated E for roll resistance, which effects fuel efficiency, and C for wet traction. The tire costs 46.60 euros, compared with 79.70 euros for a Continental tire that has the same roll rating and an E wet-grip grade, according to German online dealer ReifenDirekt.de.
A Pirelli counterpart, which is rated F for efficiency and E for traction, was offered on the site for 52.60 euros, a 47 percent discount from its 99.50-euro list price.
“Certain Asian manufacturers have really good labels,” Frank Schuhardt, chief financial officer of Delticom AG (DEX), Europe’s biggest tire dealer and the owner ReifenDirekt.de, said in a September interview. “Anyone that thought volume would automatically swing to the premium manufacturers doesn’t understand the nature of competition.”
European manufacturers complain that the labels only highlight three criteria rather than the broader range of aspects that define high-end tires, including acceleration, driving stability and durability. The grades also aren’t much use for consumers judging performance in snow conditions.
“Customers who look only at the label might get confused,” said Alexander Bahlmann, a spokesman for Hanover, Germany-based Continental. “Some tires may perform better than Continental products in the areas covered by the label because Continental aims at a very good overall performance.”
While budget brands may initially be competitive in the ratings system, the major international manufacturers should be able to engineer their tires toward the top end of the scale over time and offset the allure of low-price competition, said Kristina Church, a London-based analyst with Barclays.
“There may be some customers in the short term that move down to cheaper tires because of the ratings,” said the analyst, who has an overweight rating on Continental and an equalweight rating on Michelin. “Once the system shakes out, the European premium brands should be able to underscore their technology lead and defend market share.”
There’s also a risk that label ratings, which are generated by the companies themselves based on standardized tests, get fudged. That requires tight policing by European authorities and the industry itself to ensure that the ratings remain credible to deflect the focus on price, said Juergen Resch, head of German environmental group Deutsche Umwelthilfe.
“The label not only alters customer behavior,” Resch said. “It primarily changes the offering of the manufacturers and the dealers. It will help raise the overall quality.”
An emphasis on performance spurred by the ratings may ultimately play into the hands of European tire companies. Continental, Michelin and Pirelli are three of the top four performers in the 13-member Euro Stoxx autos and parts index this year, led by Continental’s 57 percent surge.
“For the industry, it’s good, and for a player like us concentrated on premium, it’s even better,” said Pirelli’s Tronchetti.
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