WASHINGTON—Interest rates are rising, but haven't risen enough yet to make much of a difference in the day-to-day operations or future plans of tire dealers or manufacturers. This was the nearly unanimous consensus of several tire industry executives contacted about interest rates and their effect on business. But just because the situation isn't difficult now doesn't mean it won't get that way soon, according to an economist well-known in the industry.
"The prime rate is now at 9.5 percent," said George Dagnino, president of Peter Dag & Associates, an Akron-based investment consulting firm, and former chief economist for Goodyear. "As the prime rate rises, mortgages and housing costs are rising. Housing is flat to down, and the next thing will be car sales. People will buy fewer cars, and also fewer original equipment and replacement tires."
All the indicators are in place for a recession in 2001, Mr. Dagnino said. Rising interest rates, plus price hikes in crude oil and "huge liquidity" caused by the Federal Reserve allowing an unchecked expansion of the money supply, are creating the conditions for "a classic boom-to-bust cycle," he said.
"The more abrupt the boom, the more abrupt the downturn," Mr. Dagnino said. "It's happened seven times since 1955, and I don't see why the eighth time should be different." He called the current situation "the worst time for anyone to expand," and said corporate expansion plans should be put on hold until interest rates come down.
This obviously is not good news for expansion-minded tire dealers and manufacturers, of which there are many. But there also are opportunities arising for enterprising dealers during a time of rising interest rates, said Donald Roof, president of Heafner Tire Group Inc., the Charlotte, N.C.-based tire distributor and retailer, which boasts more than 200 outlets nationwide.
"A time like this makes asset management all the more critical to the industry, and the ability to minimize inventory minimizes the amount of asset management you have to do," Mr. Roof said. "Tire dealers can do that by relying more on distributors, particularly distributors.|.|.|with high delivery service ability."
But Heafner Tire, like most other companies contacted, isn't suffering under its current debt load, because it financed those loans at a fixed rate when interest rates were still low.
"We have $150 million worth of public, high-yield, 10-year bonds which mature in 2008, and the interest rate is fixed," Mr. Roof said. "Well over half of our borrowings, in fact going on three-fourths, are at a fixed interest rate."
Goodyear took similar actions last year when it financed its strategic alliance with Sumitomo Rubber Industries Ltd. (Dunlop), a Goodyear spokesman said.
"The great advantage of the low interest rates you had then is that, as time went on, we could begin to refinance our short-term debt into longer-term, fixed-rate debt," the spokesman said. This is precisely what happened, he added, when in March the company refinanced $600 million of its approximately $1 billion debt on the Sumitomo/ Dunlop deal.
Goodyear is not fazed by the prospect of higher interest rates, because the company had assumed interest rates would rise during 2000 and wrote those assumptions into its financial plans for the year, the spokesman said.
"You look at the forecasts, so do automobile manufacturers, and that goes into the OE forecast," he said. "Unless there's a radical downturn, we see a softening in the OE market. That generally frees up capacity for the replacement market, where we had some difficulties filling our orders last year—although that's improved."
Unlike Mr. Dagnino, Goodyear doesn't foresee a softening in the replacement market to parallel that in OE. "Generally, past history has shown that when people don't buy cars, they buy replacement tires," the spokesman said. "That's a purchase you can only delay so long."
Some companies said they might have to reconsider their acquisition and expansion plans because of rising interest rates. "When interest rates go up, the ultimate value of a business goes down," Mr. Roof said.
"One place I have felt it (the rise in interest rates) a little bit is in new store development—the commitment for long-term money to build new stores," said Larry Morgan, chairman and CEO of Morgan Tire & Auto Inc., the 350-outlet tire dealer giant based in Clearwater, Fla.
But Larry Day, president of TBC Corp., the Memphis, Tenn.-based private tire brander and distributor, said his company's expansion plans aren't changing at all.
"In the long term, TBC is committed to its expansion strategy," Mr. Day said. "We want to continue our policy of acquiring firms to increase our profile and customer base while investing in our current product lines to supply our current list of customers."
Of all the corporate executives contacted, the only one who echoed Mr. Dagnino's gloomy predictions was Maurice "Morry" Taylor Jr., chairman and CEO of Titan International Inc., Quincy, Ill. Titan, a maker of industrial and farm tires and wheels, has been afflicted by long-term strikes at its tire plants in Des Moines, Iowa, and Natchez, Miss.
"(If) they keep raising the (interest) rates, they're going to bring this baby (the economic boom) to a screeching halt," Mr. Taylor said. "History repeats."
In the current financial situation, "you don't spend as much money, and you watch your borrowings," he said. "You're not going to do a lot of the things you'd probably do otherwise, because you don't want to just be working for the bank. You raise your prices, you watch your receivables and you watch your payables—it's a big thing."