AKRON—While many market indicators point to continued economic growth across North America in 1999, retailers should not expect passenger car tire prices to keep pace, tire industry stock analysts warn. Thanks in large part to the effects of the Asian flu—the economic variety—the North American marketplace has been inundated with record numbers of tires pouring in from South Korea, China, Indonesia, Thailand etc., adding to an erosion of prices that has lasted for better than two years.
Compounding the problem in 1999 will be the spread of the ``Asian flu'' to South America, freeing up capacities there for export, most likely to North America and Europe, said Stephen Girsky, a principal analyst with Morgan Stanley Dean Witter & Co.
``The global business is here to stay,'' said Nicholas Colas of Credit Suisse First Boston. ``The U.S. is the most competitive market in the world, with low import tariffs on tires and other aftermarket parts.
``There is lots of excess capacity around the world at the moment,'' Mr. Colas said. ``This is why the majors—Goodyear, Michelin, Bridgestone—are making more and more of their low-end, commodity-type tires offshore in low-cost plants.''
Imports from low-cost countries traditionally impact the lower end of the market, Mr. Girsky said, which puts particular pressure on the private-brand segment.
Car-tire imports through September were up nearly 16 percent over the same nine-month period in 1997 and are expected to reach 55 million units this year, according to Rubber Manufacturers Association forecasts. Assuming nearly all of these go into the replacement market, imports will approach a 30-percent share of the U.S. aftermarket.
Imports of light- and medium-truck tires through September were 41.5 percent and 60 percent ahead of the 1997 pace, respectively.
1998 may have been a watershed year for imports, however, as extensive capacity expansions in the U.S. by Bridgestone/Firestone Inc. and Michelin North America are gearing up to full capacity, said Nick Lobaccaro, an analyst with Merrill Lynch Global Securities. The RMA predicts imports next year will be unchanged or decline from 1998 levels.
Most of the leading business indicators point to continued economic expansion, the analysts agreed.
The mild winter thus far has meant lower prices on several fronts—retail gasoline prices for consumers, raw materials prices for tire makers and heating oil prices for retailers.
Lower gasoline prices at the pump may lead to increased driving, which accelerates tire and component wear, the analysts said.
The late onset of winter throughout most of the U.S. and Canada has all but killed off the snow-tire business for the 1998-99 winter, Mr. Colas said, at a time when the major tire makers were devoting increasing resources to developing winter tires for North America.
Dealers in the snow-belt states also could be hurt, because many of them already have too much winter inventory left over from last year, Mr. Lobaccaro said.
Growing sales of light trucks, vans and sport-utility vehicles are a positive development for the tire industry overall, Mr. Colas said.
These vehicles require larger tires and wheels, which command higher prices and, hopefully, higher profit-margin potential, Mr. Girsky added. Owners of such vehicles also are good candidates for tire-wheel package sales and other accessories, the analysts agreed.
To date, the domestic manufacturers have enjoyed a ``home-field advantage'' when it comes to the LT/SUV/van market, Mr. Colas said, since this type of vehicle category is primarily a North American phenomenon.
The trucking industry will be hard-pressed to match the record sales of new trucks and trailers in 1998, Mr. Girsky said, but the pace of trucking activity should continue to accelerate, fueling replacement truck-tire and retread sales.
Through August 1998, trucking traffic had increased over the prior year period for 20 consecutive months, according to the American Trucking Associations' monthly index of tonnage shipments.
The vibrant trucking market is reflected in tire prices, Mr. Girsky said, citing Department of Labor data showing truck-tire prices in September up 1.6 percent over the comparable 1997 figure.
The strength of the trucking industry also is playing out in the retreading industry, where the major tire makers ``have woken up to the profit potential of this business,'' Mr. Colas said. ``They've realized they can sell a service over and over vs. selling a tire one time.''
The key to future growth in this segment will be trying to reduce the commodity nature of the product and increase the cost of switching to competitors' products, in an effort to increase brand loyalty, Mr. Colas noted.