AKRON—It's a cinch that few people except the most hardcore tire industry "junkies" would find a recently published overview of the North American tire market a likely candidate for a riveting late-night read.
But for insomniacs, the report, based on research by Deutsche Bank Securities Inc., won't provide much comfort either—or a good night's sleep. One need only look at some of the following "key points," highlighted in the first few pages of the report's executive summary, to realize the industry still faces many of the same demons it has fought for years, and a few newer ones, as well:
Tires are a commodity.
The industry has too much production capacity.
Overcapacity will be getting worse.
There's potential for a margin squeeze.
Internet-based procurement tools could further erode already minuscule profitability of tire manufacturers serving the original equipment market.
The entry of auto makers into the replacement tire business could put pressure on margins.
As a result of continued industry consolidation, according to the report, the 10 largest tire manufacturers now account for more than 80 percent of the estimated $70 billion global tire industry. The concentration in North America and Europe is even more acute, it stated, with the top five players accounting for 88.5 percent and 83 percent, respectively, of each of those markets.
Still, as Deutsche Bank pointed out in its report, "market share is easy to lose. It is more difficult to win back."
And despite continuing consolidation—and it has occurred not only at the manufacturing level, but also in the tire retailing trenches among dealerships—"the benefits of a concentrated oligopoly have not yet materialized," Deutsche Bank noted.
Automotive tire pricing has been trending down for years, it continued, and currently is on a par with levels achieved during the early and late 1980s. For example, the Producer Price Index for tires was down 0.4 percent in 1999 vs. 1998.
"We believe that the fundamental problem in the tire industry appears to be overcapacity, in an industry that seems to have limited product differentiation," the report said.
The rising cost of raw materials and the inability to make price hikes stick also continue to contribute to the ebb and flow of market share among the industry's top five manufacturers.
Meanwhile, a key factor with some tire makers—such as Bridgestone/ Firestone Inc.—may be the specter of likely labor cost increases, as contracts with the United Steelworkers of America are up for renewal.
The roller coaster ride doesn't appear to be any closer to ending.
Deutsche Bank analysts said they have counted, in aggregate, "50 million units of incremental capacity coming on stream globally over the next two years.
"This is partially offset by planned reductions in capacity, which we estimate at roughly 30 million units," Deutsche Bank continued. "We would note, however, that the net incremental capacity coming on stream is probably greater than 20 million units."