Follow the Leader

Implications: A Sea Change has occurred in the Tire Industry. Major changes in production locations, pricing strategy,capital investment are happening today.

Analysis:  Over the past few years a sea change appears to be happening in the Tire Industry. Once, a truly competitive oligopoly, the industry has made significant changes. Let’s examine the major changes that have had the most impact. The industry has a lemming or sheep like attitude for many years where the smaller players always attempted to follow the leaders.
   First, you have to understand that tires are really just high-tech commodities. Fortunes are spent in promotion and advertising, but at the end of the day, all of the top ten tire companies make excellent tires. They are always attempting to differentiate their products without a lot of success. A large percentage of consumers do not know what type tires they have on their vehicles. We have three types of purchasers of tires. The sophisticated buyer with enough wealth that cost is not a concern who will buy the highest priced tires available. We have the young folks who buy tires to enhance the appearance of the vehicle. They buy tires with large white letters, fancy sidewalls etc. without regard to cost. Then we have the large majority of folks, probably 80-85% who buy strictly on price. They read the advertisements that are published once a week or call and shop around to find the lowest price. This is especially true if they have any plans to trade vehicles in the future.   Tires are a negative purchase or as we used to phrase it in the industry, (an   OH SH__, I need tires purchase). Folks do not get up in the morning excited about buying tire like they would cars, stereos, and televisions.
 Now, let’s discuss the major changes.   Let’s start with off/shore production. Every major tire company with has attempted to shift their production in North America to high performance, high value added sizes to bolster their profitability. A major attempt to locate their broad-line production in low wage countries has taken place. Huge increases in imports from China, Brazil, and Mexico for example. They also are attempting to run from their unionized facilities with contracts that are not affordable and restrictive practices that do not allow for improved efficiency.
   Pricing strategy has changed remarkably over the past several years. Companies used to announce a price increase on Friday and by Monday it would be discounted back to a level that was sometimes below the price announced. The industry was so competitive that prices just did not stick. Prices increases today are sticking as they never have before. It appears that a quarter does not go by without major price increases being announced by almost all the players. They finally realized that with raw material prices increasing by double-digits numbers that continuing practices of the past was a road to bankruptcy. Will this type of discipline hold true as the economy slows and shifts to smaller fuel efficient vehicles? What will happen when they have to start idling factories? Will the pricing habits of the past return as they attempt to keep the plants running? It will be interesting to see what happens.
 
  Another major change has been the drive for efficiency. A large portion of the capital being invested in the industry is being directed at efficiency improvements and automation. The only capacity expansions of significance domestically have been in the Giant Tire segment.   Let’s hope that just as the industry has converted their production domestically to larger and larger high-performance, high-value added products, that high fuel prices do not convert the market to smaller vehicles. Smaller vehicles do not require large tires that we see today on SUV’s, Large Sedans etc.   It would be disastrous to see the industry as far behind the curve as General Motors. The first half of the year, almost all of the tire companies experienced a loss in value. .