SEOUL, South Korea (June 2, 2004) — Kumho Tire Co. Inc.'s goal for the next few years is crystal clear: Be the most profitable of the world's major tire makers.
The road map to getting there is a bit murkier, but the firm's top executives are sharpening the focus daily on that journey.
The drive to growth and prosperity starts at the top, with President and CEO Sae-Chul Oh—known throughout the company as “7-11” for his penchant for putting in 18-hour days—who advanced to the top executive's post earlier this year. He's been with the company 30 years in a variety of engineering and management positions.
Dr. Oh—he earned a doctorate in polymer engineering in 1996—preaches to his troops that the way to achieve their goals is through becoming “technology intensive,” starting with automated, cell-based manufacturing and new materials development and culminating in fuel-efficient tires and environmentally friendly processes.
“We realize we can't be a global leader,” Dr. Oh said recently at Kumho's headquarters in downtown Seoul. “We want to be a fast follower but also a leader in niche markets.”
As for achieving higher added value, Dr. Oh said, “We understand that the only way to remain competitive in this increasingly competitive environment is to provide products and services differentiated from those of other companies.”
On the profitability front, Kumho has targeted a 15-percent operating earnings/sales ratio as its goal. The past three years it averaged 13 percent, although the ratio dipped to 10 percent last year as the firm struggled with a sluggish domestic market, skyrocketing raw materials prices, general economic uncertainty and an appreciating Korean won.
For 2004 Kumho has targeted an earnings rebound back to the 2002 level and then 10 percent annual improvement through 2008. Sales are projected to hit $1.4 billion this year and continue growing about 6 percent a year to reach $ 1.6 billion by 2008 when management foresees being the eighth-largest tire maker globally.
Kumho's fundamental business depends largely on how successful it is exporting products. Overseas business represents about 60-65 percent of the firm's sales and slightly more of earnings, due to the greater percentage of higher value-added performance products sold in markets outside of Korea, said J.H. Kim, executive vice president, sales/marketing for domestics and overseas.
Kumho's export business dipped somewhat last year as the company was dealing with demand at home in Korea, its expanding operations in China and shifting currency values. Sales in North America, for example, were off 8 percent last year, but business in Europe was up 17 percent as the company exercised its “swing strategy” of allocating supply to the region or regions globally that offer the greatest potential for profits.
Kumho Tire U.S.A. Inc. executives, however, are targeting double-digit sales growth this year in the U.S., based on the the addition of new original equipment-dedicated capacity brought on stream late last year in Korea that should free up capacity at Kumho's other plants for export-oriented production. Overall, Kumho has carved out about a 2.5-percent share of the U.S. replacement market, but the firm is more focused on the high-performance segment, where it has targeted a 10-percent share.
Exports to Mexico, however, have all but stopped since Mexico doubled duties on imported tires, Mr. Kim said. Kumho reported sales of about $17 million to $20 million in Mexico in years past, he said.
Considering the importance of North America (20 percent of global sales) and Europe (15 percent) to Kumho's business strategy, might Kumho consider establishing manufacturing in North America or Europe?
“It's possible,…but not yet,” Mr. Oh said, declining to quantify what export sales Kumho would have to achieve before an overseas plant would be-come worth considering. In the same thought, though, he mentioned that Korean car makers (and Kumho customers) Hyundai Motor Co. and Kia Motors Corp. are moving overseas—Hyundai opening a plant in Alabama later this year and Kia choosing a site in the Slovak Republic for its first overseas plant.
In Korea, Kumho has just opened its first automated modular plant, in Pyeongtaek near Seoul that could be a prototype for satellite plants in burgeoning markets. The Pyeongtaek Automated Production Unit (APU) is laid out to make 2 million tires a year, about 80 percent of which go directly to Hyundai and Kia car assembly plants nearby, according to Jong-Sun Sun, general manager of the new plant.
Kumho built and commissioned the 184,730-sq.-ft. plant in 16 months, and Jong-Sun Sun, general manager of the Pyeongtaek plant, said the company believes it could set the next one up in about 12 months. Kumho invested $62 million in the Pyeongtaek plant, which employs only 174 workers but does not have rubber compounding on site.
By comparison, Japan's Toyo Tire & Rubber Co. Ltd., which reports $450 million in sales in North America—compared with Kumho's $412 million—has committed $150 million to build a plant in the U.S. and is in final site selection.
At the same time, Kumho is investing heavily in China, where management aims to become the No. 1 replacement brand by 2005. The firm, through its Nanjing Kumho Tire Co. Ltd. subsidiary in Nanjing, China, is targeting a 15-percent passenger tire market share by next year.
The company has achieved success in southern China, where Nanjing is located, but only recently expanded the Kumho brand nationwide after a three-year moratorium on the brand in northern China expired. The restriction was the result of Kumho's having sold its Tianjin Kumho Tires unit in Tianjin to Bridgestone Corp. in 2000; at that time the companies agreed to the market constraint.
Kumho said it intends to more than double annual production at Nanjing in the next three years to 11 million units by constructing what amounts to a second factory on the grounds of the existing 7-year-old plant. Eleven million units a year would represent 25 percent of the Chinese replacement market for car tires by 2005, according to Kumho forecasts for the country.
Another aspect of the growth in China is the cost of manufacturing. Kumho said in its 2002 annual report the average monthly salary of a Chinese tire worker is $251 vs. $1,000 a month in South Korea. U.S. tire workers earn about $3,600 a month.
Hearkening back to Dr. Oh's desire to have technology drive the firm's growth, Kumho is working on several projects the firm hopes consumers perceive as high-tech. Among these are run-flat tires (combined with an in-house-developed tire pressure monitoring system), low rolling-resistance electric vehicle tires and tires made without highly aromatic oils (suspected carcinogens).
The latter of these developments, used in the firm's SWN7401 I'Zen tire, helped the company earn a Green Swan Ecolabel award from the Nordic Ecolabeling Board, symbolizing an ecologically friendly product.
In order to achieve some of these technical goals, Dr. Oh said his R&D team needs to do more fundamental research into new materials. A common thread throughout the R&D discussion is weight: reducing weight or mass will result in rolling resistance improvements and satisfy OE requirements, Dr. Oh said.
Kumho invests about 3 percent of its sales revenue annually on R&D.
As for brand recognition, Kumho has hitched its brand ID wagon to motorsports, becoming the spec tire for several internationally active Formula 3 open-wheel racing series, supporting rally teams in Europe and Asia, etc. Most recently it announced its participation in the Japan Grand Touring Championship as a way to break into the Japanese market.
The company looked at various venues in U.S. motorsports but found with so many racing series going to spec tires, the costs associated with it were prohibitive.
“One day we'd like to be in a position to be able to supply Formula 1,” Dr. Oh said.
In the past year, Kumho started a new income source—selling equipment and know-how. The firm's first client, Linglong Co. in Sandong, China, paid Kumho $5 million for tire building equipment and operating know-how.