Analysis: Kumho Tire Faced with Reputation Risk in China
    2011-03-23 12:57:42     Xinhua      Web Editor: Liu
 
Kumho Tire, the biggest tire supplier to carmakers in China, is faced with reputation risk.

China Central Television (CCTV) reported last week that the Gwangju, South Korea-based company used excessive amounts of recycled rubber as raw materials than its own guidelines at its Tianjin factory, saying that could cause tires to rupture.

Kumho Tire is one of the largest tire manufacturers in China, with its market share estimated at 16 percent as of last year. China has topped the U.S. as the world's largest auto market and accounts for 30 percent of Kumho's global sales.

Chinese consumers expressed their furies against Kumho as the large-scale South Korean tiremaker used more recycled rubber than its internal standards, which may cause car accidents with tire rupturing.

Even though Lee Han-seop, the head of Kumho's China subsidiary, publicly apologized to Chinese consumers on a CCTV program Monday, many consumers still have deep distrust in Kumho, with some urging the prosecution to take legal action against all those involved in the tire-manufacturing process.

Lee vowed to recall all of its defective products, but the company did not provide details regarding when and how it will conduct the recall.

Xu Minfeng, a car analyst with Central China securities, suspects that Kumho used excessive recycled tires in order to save costs. The price of natural rubber has been soaring recently and recycled tires are cheap to use.

DEFECTIVE TIRES TO BE RECALLED

Kumho has decided to recall some of its products in China following reports that tires made by the company failed quality standards.

After visiting the Tianjin factory and conducting thorough investigation into production process, Kumho found that internal production standards were not strictly observed and discharged head of the factory and employees involved in negligent quality control.

Kumho said in a statement that it applied for voluntary recall to the relevant authorities and promised to provide their utmost cooperation with the Chinese government, adding that it will deal with all the product-related claims from customers' point of view.

According to the statement sent Tuesday to Xinhua, Kumho, however, insisted that it has used rework rubber, not recycled rubber.

According to Kumho, rework rubber is totally different from recycled rubber. Rework rubber is the residue of original rubber that results from tire production, which did not add chemical additives nor assemble scraps of waste rubber.

All tire producers use combination of rework and original rubber in line with scientific production standards, Kumho said.

However, the company acknowledged that the factory in Tianjin used more rework rubber than its internal standards. Kumho has four plants in China, with two in Nanjing, and one in Changchun and Tianjin respectively. "The ratio of remaining rubber used in Tianjin against original rubber reached 1 to 2, higher than Kumho's internal standard 1 to 3," a spokesman at Kumho Tire told Xinhua.

"We accept the CCTV's reports that there were problems during Kumho's tire production process in Tianjin, but rework rubber was usually used in the tire-making industry," he said.

Despite the Kumho's explanation, Chinese consumers appear to remain dissatisfied with its remarks and apology.

Worried about auto safety, some consumers have postponed their plans to purchase cars. "I will wait until all the defective tires are recalled. I dare not buy a car," said Wu, a consumer looking to purchase a car.

Car retailers in Shanghai also complained that their service hotline has been extremely busy as many consumers call to ask whether their tires could be faulty.

PROMPT RESPONSE

According to the CCTV report, Kumho Tire supplies tires to the Chinese ventures of General Motors (GM), Volkswagen and Hyundai Motor. Following the CCTV reports, they sought to minimize damages from the tainted brand issue.

The Chinese automakers were quick to deal with the Kumho's brand-damage issue by responding promptly to the CCTV's news reports.

Right after the reports, the Great Wall Motor Company said that it would change all the products into new ones if customers are to clamor for exchanges, adding that it is considering not using Kumho's products down the road.

Dongfeng Motor Corp. said that tires used for manufacturing their cars were all made in Nanjing factory, promising its free-of- charge investigation and exchanges of their built-in tires. FAW-VW Automobile also confirmed that it has used Kumho tires mainly made in Changchun and Nanjing factories.

The Chinese ventures of foreign carmakers showed their knee- jerk reaction against the issue for fear of being blamed for their quality control along with Kumho Tire.

GM's Shanghai venture immediately issued an online statement after the TV report on the defective tires, saying that the Kumho tires used were produced in Nanjing. The company also said that it would help handle consumer complaints or inquiries.

Chery Automobile also told Xinhua that none of the Kumho tires used on some of its vehicles is made at the Tianjin plant.

Volkswagen Shanghai venture said on its website that none of the vehicles manufactured at the venture has ever used Kumho's tires. A spokesman at Hyundai Motor told Xinhua that the company is figuring out the matter.

CONFIDENCE RESTORATION

Market watchers here said that Kumho Tire will inevitably be damaged with their reputation in China, one of the company's growth drivers, stressing that it remains to be seen whether the South Korean tiremaker may restore their confidence from the Chinese consumers and its client companies.

Experts noted any sign of potential damage to Hyundai Motor, one of Kumho's key clients, has not been spotted yet, but Hyundai could shun the reputation risk through contractor shift from Kumho to another tiremaker such as Hankook Tire.

"In terms of original equipment (OE) sector, Kumho Tire has the biggest market share of 23 percent in China, but Kumho's brand will likely be damaged on the CCTV's reports," Park Sang-won, a Seoul-based analyst at Eugene Investment & Securities, told Xinhua.

"Kumho has a strong point in the OE area, which usually improves the performance in the replacement equipment (RE) sector. Kumho could minimize the reputation risk assuming that Kumho smoothly manage relationship with client companies," Park said.

"Kumho reportedly used the residue of original tire, which is totally different from recycled rubber. If the misunderstanding were to be resolved, the issue would have a limited impact on Kumho, but it has already been broadcast in a large way, so the company's brand will likely be damaged," Lee Sang-hyun, an analyst at NH Investment & Securities in Seoul, said by phone.

"Hyundai Motor will not be influenced by the Kumho issue because the South Korean carmaker may shift its tire supplier from Kumho to other companies if public opinion among Chinese consumers deteriorates," he added.

"Kumho decided to apply for voluntary recall, but it remains to be seen how Chinese consumers and its client companies would accept the decision," Yim Eun-young, an analyst at Dongbu Securities, said by phone.

"Kumho is faced with brand risk in China which is the biggest market of the company and is very important for turnaround in earnings of the firm," he added.

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