HILTON HEAD ISLAND, S.C.-The tire industry is on a ``treadmill,'' trying to keep profits rising while facing overcapacity, higher costs and shrinking prices. If the trend continues, the industry will see either further consolidation or the closing of a second-tier tire producer, according to Dennis M. Byrne, professor of economics at the University of Akron. Mr. Byrne presented ``The Real Problem with the Tire Industry'' at the Clemson University Tire Industry Conference March 9-10 at Hilton Head Island.
The 1980s saw the consolidation of the tire industry, but the recent slowing of the merger/takeover mania hasn't brought peace, he said. ``Rather, the remaining tire producers are still in the process of paring costs, closing facilities and attempting to raise capacity. The tire wars are not over.''
However, the battlefield has shifted to the negotiating table, he said. The current strike against Bridgestone/Firestone Inc. and the former walkout against Pirelli Armstrong Tire Corp. are the tire makers' continuing attempts to control costs, he said.
``Ultimately, the basic problems that have plagued the industry for decades are the root cause of the breakdown in the industrial relations process that we currently observe,'' Mr. Byrne said.
One problem is tire prices. In order for revenue to grow, one of two things must happen-either the prices per unit or the number of units sold must rise, he said.
If a manufacturer increases unit output because of excess demand, then that company operates in a healthy, prosperous market. However, if a company increases units sold by cutting prices, then it must constantly increase productivity and/or cut costs to survive, Mr. Byrne said.
From 1985 to 1994, tire prices rose at an annual rate of only 0.73 percent, according to the Consumer Price Index. But when compared with inflation rates during the same period, tire prices actually fell 2.61 percent, meaning ``tire prices, in relative terms, were lower in 1994 than in 1986,'' he said.
If companies are reporting profits while tire prices are declining, then the cost of producing tires also must be falling, he added.
By examining the Producer Prices Indexes for the major radial tire components-carbon black, synthetic and natural rubber, steel wire and synthetic fibers-Mr. Byrne concluded that, on average, the cost of these raw materials fell 1.02 percent from the mid 1980s to the present.
However, while material prices declined, they didn't fall as quickly as tire prices, which placed pressure on the tire industry's profitability.
Additionally, during the last two years, raw material costs have risen substantially.
Added to the equation is labor cost. Wages have grown at an annual average of 3 percent since 1985, but once inflation is calculated, wage growth over the decade falls 0.7 percent. ``Real wages have stagnated, and this is a major reason the URW has been militant in its negotiating position,'' Mr. Byrne said.
Wages are only a part of labor costs, however. Fringe benefits add about 35 percent to the wage bill of the average company, he said, and medical care costs have risen at an inflation-adjusted rate of 3.7 percent a year.
``Therefore, in an industry that is suffering from falling real output prices, labor costs are rising both relatively and absolutely compared with both tire prices and other raw material costs.''
So what's a tire maker to do? Mr. Byrne said most companies have taken the route of investing in technology and modernizing plants. ``The goal is to increase profitability via more output per man-hour worked.''
This thinking has led tire companies-faced with millions of dollars invested in plants and equipment-to increase the profitability of their investments. ``Continuous operations are one way to use capital more intensively and to increase the rate of return on the capital investment. . . . Given the economics of the situation, no firm can afford to have its capital lying idle for significant periods of time,'' the economist said.
As each tire company produces more product to keep profitable, overcapacity results. ``What is good for the individual company is detrimental to the industry as a whole,'' he said.
Mr. Byrne concluded that the real problem with the tire industry is the lack of demand pressure that would allow the firms to increase prices. ``Until the real price of tires begins to rise, the industry must constantly attempt to increase operating efficiencies in order to maintain profitability,'' he said. ``However, each company in its own defense must match the efficiency gains of its competitor. The result will be the same: better tires at lower prices.''
To break the cycle, one of two things must happen. A tire company could fold, which Mr. Byrne said is likely, or new markets and products must be found.
``In any realistic analysis, until real tire prices rise, the quest for further operating efficiencies is bound to fail.''