(Bloomberg) -- Swedish manufacturer Trelleborg AB is aiming to use new farm tire factories in the U.S. to go up against bigger rivals Bridgestone Inc. and Titan International and capture as much as a fifth of the North American market.
“If you want to be successful in North America, you need local production,” Chief Executive Officer Peter Nilsson said in an interview in Trelleborg, the southern Swedish port city where the company is based. “Now we have that.”
Trelleborg's transatlantic offensive comes after its 10.9 billion-krona ($1.27 billion) acquisition earlier this year of Czech tire manufacturer CGS, a bold bet on a market that is three years into a downturn as farmers curb spending amid low crop prices. The purchase came with a factory in Charles City, Iowa that makes farm tires under the Mitas brand. The deal will double the size of Trelleborg's tire-making unit and provide a firmer foothold in the U.S., where it currently holds just a few percent of the market.
The Iowa installation and Trelleborg's new factory in Spartanburg, South Carolina, were built with expansion in mind, Nilsson said in the interview, adding that production capacity can be increased at relatively low cost to allow growth.
New Suppliers
With Titan, which makes farm tires under the Goodyear brand, and Bridgestone having more than half of the U.S. farm tire market between them, tractor manufacturers like Deere & Co, AGCO Corp. and Case New Holland will be more than happy to have a new supplier, according to Nilsson.
“At the moment it's hard for them to reallocate volumes to us, but when the market recovers we expect even more business,” the CEO said. “They would prefer to have another competitor.”
During his 11-year tenure, Nilsson has transformed Trelleborg from a disparate conglomerate heavily weighted with automotive businesses into a more focused company making polymer products like rubber fenders to protect ship hulls and specialist tires for tractors, harvesters and forklift trucks. In addition to buying CGS, Trelleborg this year divested a joint-venture unit making anti-vibration equipment for cars.
Now, Trelleborg and rivals are facing high numbers of unsold machines, with North American tractor inventories at their highest seasonally in at least a decade, according to data compiled by Bloomberg.
The most likely scenario for Trelleborg is to get mild growth in the 2017 sales season, followed by a stronger upturn in the years to come, Nilsson said. To reach a 5 percent annual organic growth target, Trelleborg may need recovery in the oil and gas market, as well as the agricultural sector.
“The lack of organic growth over the last couple of years has been disappointing but the revenue decline can partly be explained by the fall in global rubber prices,” Andreas Brock, a Stockholm-based money manager at Coeli Asset Management, which doesn't hold the stock, said in an e-mailed response to questions. “The agricultural sector has been weak for a long time now, but when it turns, Trelleborg's share price is going to do very well.”
The shares gained 0.5 percent to 167 kronor as of 2:41 p.m. in Stockholm on Friday. The stock has jumped some 30 percent over the past year, giving Trelleborg a market capitalization of about 45 billion kronor.
As there are scant signs of any rebound in tractor sales, Trelleborg expects growth to be mainly driven by farmers' need to replace tires on their vehicles. The U.S. Department of Agriculture last month predicted a record corn crop, which will do nothing to reduce the global glut of grains and oilseeds that have sent crop prices -- and farm incomes -- lower in recent years.
“I feel zero concern that we've made a bad bet,” Nilsson said. “It's just that we don't know exactly when it will rebound.”
To contact the reporter on this story: Niclas Rolander in Stockholm at nrolander@bloomberg.net. To contact the editors responsible for this story: Tara Patel at tpatel2@bloomberg.net, John Bowker, Andrew Noël
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