Summary
Significant changes in the tire industry over the past decade have been major shifting to low cost countries of production and extreme upsizing in North America. How will these strategies hold up in the recession and long term implications.
Analysis
The strategies of the tire producing companies have been interesting to observe over the past decade. They spend millions on top of millions in an effort to differentiate themselves from each other. They would have you believe in their advertisements that they have found some wonderful magical innovation that will put them out in front of all their competitors. This approach has not changed since the conversion of tires from bias to radial.
Let’s explore some of the significant changes over the past couple of decades. One of the most significant changes, especially over the past ten years or so has been pricing discipline. It used to be nonexistent. Just a few years ago, price increases would be announced on Thursday and by Monday would be discounted back below to what the original price was on Thursday. The tire industry was one of the last truly competitive oligopolies in the World. In those days a crisis like today would have them almost giving the product away to keep the factories running. What changed this? The explosion of raw material prices with double-digit year over year increases woke everybody up. They realized that without price recovery for materials that somebody was headed for bankruptcy. Prices started sticking and sometimes were announced almost every quarter. This was not the old 3-5% stuff. You would even see double-digit at times and the entire range shifted upward significantly. Will this trend of price discipline hold during this present severe downturn? I do not have a definitive answer for this. I think that the increases will slow dramatically. I do know if they do revert to the days of old that someone will be missing and it could be a big one.
Another significant change or trend was the “lemming” like strategy of finding off/shore production for broad line product and the attempt to upsize-high-performance the majority of domestic North American production. Everyone was looking for a Chinese, Brazilian, Rumanian, and Indonesian etc. low cost source. Tire sizes in the United States went from 13”, 14”, 15” rim diameters to 16”, 17”, 18”, 19”, 20”, 22”. Everybody wanted to get on the bandwagon and produce higher margin, higher value added products in their higher cost domestic operations. This was especially true in those operations carrying the high legacy cost associated with their age. It appears that we have reached 50% of all tires sold in the US imported from off/shore almost under the radar. Everyday we read about some distressed plant in the US and if we search, we will find an increase in production in China. I spent over 40 years in the tire industry and I still do not understand the shift to high-performance/ultra high-performance in a country with 55-70 mph speed limits. C’mon? Do we really need 125mph to 175mph tires? Another thought on this subject. How long before China is qualified to make more than bread and butter broadline production? How long? A lot of folks think that they will not be low wage forever. I agree, but it will take much longer than it takes them to pass the learning curve on producing large high-performance tires.
I will get a lot of naysayer comments on these final comments, but here goes. Tires are high-tech commodities. They are like high-tech soybeans and corn. They probably should be sold by the pound. All of the top companies make excellent products. They spend millions on advertising trying to gain a small edge and incremental gain in marker share. The big boys Bridgestone, Continental, Goodyear, Michelin, Perelli and Cooper along with the other Korean and Japanese companies make good tires. One long term way to survive in a commodity type atmosphere is Efficiency! Efficiency! Efficiency! Another way is a true break through in technology like the shift from gears to quartz movements in watches. It is not carved in stone that tires must be made from rubber or constructed as they are today. Someone will break the paradigm. I know that folks who follow tires will remember the failed strategy of Gibara at Goodyear with run-flat/ extended mobility. They were going to sale them by the millions before they realized that average folks could not afford the price of a couple of hundred bucks plus per tire. I am not sure that the guys at the top understand how folks buy tires even with all their sophisticated statistical analysis.
We have always had three types of purchasers, the wealthy, sophisticated buyer who wants the latest and greatest and is willing to pay for it. The next group is the young buyer who wants to dress up his ride with large white letters and styling that enhances his vehicle appearance. The absolute majority are the folks who have no idea of what type of tire is on their vehicle. They search for the best price. No one in the family gets up excited about buying tires. This is not like buying a car or large screen television. Tires are a negative purchase. They are known as an ‘AW $%#&” purchase. I have to buy tires today.
