* Nokian focuses on Russian market as economy recovers
* A strategy switch after boosting exports in downturn
* Could offer some guide to operating in volatile market
* Faces risks of rising costs, limited scope to expand output
By Jack Stubbs, Gleb Stolyarov and Jussi Rosendahl
VSEVOLOZHSK/HELSINKI, Nov 2 (Reuters) - Nokian Tyres , which supported earnings during Russia’s rouble crisis by boosting exports from the country, is flipping strategy as the economy rebounds.
The Finnish firm, which makes most of its tyres in Russia, is now expanding production there to supply the local market while cutting exports. It also plans to open a factory in the United States which will further reduce the need for Russian supplies to go overseas.
The tyremaker’s flexible strategy could offer some guide to other companies and investors operating in Russia’s notoriously volatile and unpredictable market.
Yet there are risks ahead. A limited scope to further expand production and rising raw material costs could undermine Nokian’s ability to adapt to economic and industry shifts, while competition is heating up in the premium winter tyres market it specialises in.
During Russia’s 2014-16 economic crisis, Nokian hiked exports to account for 70 percent of all tyres its produced in the country, up from about 55 percent before, as manufacturing costs effectively tumbled along with the value of the rouble.
Now, though, economic growth and a stronger currency are fuelling a recovery in the Russian auto market, and new car sales are rising in 2017 after four years of decline.
Nokian has responded by redirecting export volumes to local customers. It is also spending 55 million euros ($64 million) on upgrades to its Russian factory this year, including a new production line which will lift annual capacity to 17 million tyres by the end of the year.
“We assume a sustained growth in the market in Russia in the coming two to three years,” Executive Vice President Andrei Pantioukhov told Reuters. “Judging by this, the share of local sales in our production at this factory will increase.”
Nokian - which has two plants, in Russia and Finland - also plans to start U.S. production by 2020 by building a $360 million factory in Tennessee. This will free up tyre volumes to remain in Russia, Pantioukhov said in an interview at the company’s Russian factory in Vsevolozhsk near St Petersburg.
The scale of the switch was shown in results published on Wednesday. Sales in Russia and the CIS rose 86 percent in the first nine months of 2017 and accounted for 21 percent of group sales, up from 14 percent a year before.
The company declined to disclose export volumes, but said they had fallen and now represented 66 percent of Russian production.
The tactic is showing early promise; Nokian reported a better-than-expected 21 percent rise in third-quarter profits to 90 million euros, driven by Russia and a stronger rouble, after raising its full-year earnings forecast in August.
However, it said it expected total costs for raw materials - natural rubber, synthetic rubber, carbon black and oil - to rise by 20 percent this year.
The Finnish firm, which makes 86 percent of its tyres over the border in Russia to capitalise on lower energy costs, weathered Russia’s economic crisis better than many other foreign companies.
Its export drive made it Russia’s largest exporter of consumer goods, in a market traditionally dominated by tobacco and vodka, and delivered healthy profits in the downturn which cemented its position as the country’s top tyre producer.
Nokian’s ability to weather the slump better than many in the auto industry was helped by the fact that the bulk of its manufacturing is in Russia, while many other companies like carmakers rely on imported components.
General Motors, for example, wound up production in Russia in 2015 while Renault slashed the value of its majority stake in top Russian carmaker Avtovaz.
Nokian’s strategy is not a unique one, however.
Some other manufacturers, including steelmakers and certain meat producers, have adopted the same adjustable strategy during and after the downturn, with varying degrees of success.
Among tyremakers, Nokian’s German rival Continental and Italy’s Pirelli also used exports from Russia to support earnings during the crisis years.
Continental’s 2015 Russian exports accounted for 19 percent of annual production, which it bumped up to 30 percent by 2016. “The emphasis on sales exclusively on the Russian market turned out to be incompatible with changing realities,” a spokeswoman told Reuters. It then cut exports back to the current level of 13 percent as the economy recovered.
But Nokian was better positioned than its competitors to capitalise on the opportunity thanks to the location of its factory in Vsevolozhsk, which was planned as a hub for both local and foreign sales when it was built in 2005, well ahead of many of its rivals.
Continental’s factory in Kaluga and Pirelli’s plants in Kirov and Voronezh are all hundreds of kilometres from the nearest port and were not opened until the early 2010s.
“The Nokian factory is very well placed logistically. Near St Petersburg, volumes are very easily redirected as exports through the port,” said VTB analyst Vladimir Bespalov. “If your factories are in the depths of Russia then logistics costs mean there are fewer opportunities for exports.”
Nokian faces some potential potholes though.
The company has long been at its strongest in Russia and the Nordic nations, but stiffening competition from the likes of South Korea’s Hankook in studded winter tyres could increasingly pressure Nokian’s position as a technology leader in some of those markets, analysts say.
Executive Vice President Pantioukhov declined to give precise production figures but said the Vsevolozhsk factory, which can currently produce up to 15.5 million tyres a year, was “practically running at full capacity”.
Nokian CEO Hille Korhonen told investors on Wednesday there would be no space left in the plant to add more capacity after the new production line was completed.
She also said the rising raw material costs would lead to a financial hit of about 60 million euros this year.
Petri Kajaani, an analyst at Inderes, which rates Nokian shares as “accumulate”, said the company’s capacity restraints could limit its ability to increase sales before the U.S. plant starts ramping up.
He said any price hikes on the back of higher material costs could damage the product’s appeal to Russia’s cost-conscious consumers.
“Although car sales are rising in Russia, consumers’ purchasing power is still weak,” Kajaani added. “If the upward trend in raw material costs continues, Nokian’s margins will be pressured.”
$1 = 0.8609 euros Editing by Pravin Char