AKRON (Sept. 11, 2000)—Just when it seemed the North American tire market was headed for another record year, it hit a pothole called July.
Aftermarket shipments of passenger and truck tires in July fell more than 10 percent from July 1999, according to Goodyear preliminary data, and there are enough uncertain factors floating in the wind to cloud even the best crystal balls.
The decline follows a slowing trend that started in April, and leaves year-to-date shipments about 2.5-percent ahead of the seven-month figure of 1999, according to industry data.
When considered together with marginally improved original equipment passenger tire shipments and a near 4-percent decline in OE truck tire sales, tire makers are facing the prospect of renewed price-cutting, as tires budgeted for OE accounts are redirected to the aftermarket.
Throw in double-digit increases of imported tires through June, and the price competition is destined for "cutthroat" territory, observers said.
And for good measure, toss in the recall of 6.5 million P-metric light truck tires and see what hoops tire companies will jump through to accelerate production to fill the void.
Michelin makes gains
Of the major players in the North American market, Michelin North America Inc. made the most measurable gains in the past 18 months—Goodyear´s acquisition of Dunlop Tire Corp. aside—and appears well-positioned to take advantage of short-term market opportunities as they crop up.
In a market that showed shipment growth of only about 2 to 3 percent in the first half of 2000, Michelin reported sales growth of more than 8 percent, according to industry and Michelin data.
Michelin´s performance in the first half of 2000 followed a fiscal 1999 showing of 11-percent growth over 1998—allowing the company to stake a claim on No. 2 in North America again. And for good measure, company executives have expressed ambitious goals for 2000, such as tripling the industry growth rate.
Still, even Michelin felt the effects of the slowing new-truck industry throughout the first half of 2000, noting that its growth rate in the second quarter lagged that of the first quarter because of "stagnating" truck tire sales in North America. Michelin said it expects the OE truck tire market to be sluggish through the first quarter of 2001, but the underlying strength of the U.S. economy will fuel replacement market sales at least on par with 1999.
"High fuel prices will increase demand for fuel-saving-type tires, both new and retread, as fleets seek ways to cut costs," Michelin said in a written response to questions.
Michelin´s resurging sales in North America have been replacement-market driven, after the company decided "to take a selective approach (to OE) in order to free up capacity for the replacement market." Michelin expects its OE sales this year to be on par with 1999, although it is working to align its OE fitments more closely with its aftermarket brand positioning.
Troubles at Bridgestone
Aided by the successful return of the Firestone brand to Indy racing, Nashville, Tenn.-based Bridgestone/ Firestone Inc. seemed to have nothing but Goodyear in its sights as it vaulted past Michelin last year to become the continent´s second-largest tire maker.
But the recent recall of 6.5 million Firestone light truck tires illustrates how quickly a company´s fortunes can change—almost overnight.
Some analysts have gone as far as to debate the possible demise of the Firestone brand—marking its 100th anniversary this year—and wonder how BFS will navigate the precarious financial straits into which the situation has thrown the company.
Bridgestone/Firestone´s 1999 annual report had painted a rosy picture. The firm, which comprises both North and South America and several non-tire operations as well, increased sales last year by 1.5 percent to $7.6 billion. Production volume grew 3.4 percent to 610,000 metric tons of rubber, reflecting solid demand.
However, the report said operating profit in the Americas of $543 million was unchanged from 1998.
Among factors cited for the adverse effect on earnings were start-up costs at the firm´s new plant in Aiken, S.C., market turbulence in Latin America and weakening tire demand in the agricultural and mining sectors.
Nonetheless, the tire maker said it increased its market share last year in North America in both the replacement and OE markets, with its operations on the continent approaching a stake of 20 percent.
Conti feels squeezed
Increasing raw materials prices and "intensive" price competition in both the U.S. and Mexico cut heavily into Continental General Tire Inc.´s earnings this year. Conti General Chairman Bernd Frangenberg said he doesn´t expect the rest of 2000 to hold much promise for relief.
Conti General is feeling the cost-price pinch especially hard in the commercial tire arena, which has been the company´s strongest, most profitable unit in recent years. But Mr. Frangenberg said the collapsing OE market in that segment is pushing thousands of tires previously destined for OE delivery into the aftermarket.
In addition, the market for trailer tires is being attacked heavily by lower-cost imports from Asia and Europe. The result, he said, is an all-out assault on prices to maintain market share. The price of a top-line drive or steer tire has fallen by $20 to $25 since earlier this year, for example.
For Conti General, the squeeze brought on by the bloodletting meant a 50-percent drop in operating earnings in the first six months of 2000 to $19.2 million. Sales, aided by the inclusion of results of the former Hulera Euzkadi in Mexico, jumped 23 percent to $806 million, and the company has maintained or expanded share in all its major markets, Mr. Frangenberg said.
The addition of the Mexican plants and the resolution of a strike at Conti General´s Charlotte, N.C., factory boosted available capacity by nearly 30 percent. Last year, the tire maker sold 27 million passenger tires and 2.5 million radial truck tires in North America.
The availability of the several million new units of capacity allowed Conti General to pursue new business this year. Already it has added Sears, Roebuck and Co.; Pep Boys—Manny, Moe and Jack; and Discount Tires Inc. to its list of retail accounts, along with wholesale distributors TBC Corp. and Laramie Corp./Treadways.
Questions for Goodyear
When Goodyear announced its alliance with Sumitomo Rubber Industries Ltd., it set a five-year goal to hit $21 billion in sales, and expected an eventual boost in North American tire sales of as much as $800 million through its takeover of Dunlop Tire Corp. But the Akron-based tire maker has had its problems integrating those operations.
1999 marked the fifth consecutive year in which Goodyear´s North American replacement market share declined, excluding growth by acquisitions, according to a Deutsche Bank Securities Inc. analysis of the North American industry.
While some of that slip was the result of a combination of capacity restraints and "surprisingly strong demand from auto makers," the bank´s analysts said, "Goodyear´s management is not entirely free of fault, in our opinion."
The company "appears to have had significant internal inventory control problems for some time, which have left it significantly over-inventoried in some periods and under-inventoried in others," the Deutsche Bank report said.
The accompanying slump in market share, the report added, was in part a result of Goodyear´s poor fill rates on orders—a situation that "angered dealers who have been left short."
The addition of Dunlop activities in North America and Europe could enhance Goodyear´s competitive position, the analysts said. Already, some benefits have been realized as the deal increased Goodyear´s revenue by about $2.5 billion to $14.5 billion and increased its global market share by approximately 3.6 points to 20-21 percent.
Thus far in 2000, the Dunlop activities have accounted for all of Goodyear´s sales growth in North America. For the first six months, the Dunlop business contributed $362.4 million in sales to Goodyear, which reported a 7.3-percent—$243 million—increase in North American tire sales.
Like its competitors, the company faces rising raw material and labor costs. While Goodyear´s master contract doesn´t expire until 2003, it may have to match some provisions of contracts being negotiated with Bridgestone/Firestone and Michelin. The analysts´ report said that could have a significant impact on earnings, as labor represents an estimated 30 percent of Goodyear´s costs.
Cooper plugs along
Cooper Tire & Rubber Co. also felt the effects of the slowing market in the second quarter. After posting 14-percent higher tire sales in the first quarter, Cooper saw its comparable tire sales flatten out in the second quarter vs. 1999. Unit tire sales actually dropped 3 percent in the quarter after being 13-percent ahead in the first quarter.
Cooper blamed its sales malaise on a general slowing in demand from retailers. But in particular the company noted a "significant increase in imports of low-priced tires," which had a direct effect on sales of Cooper´s entry-level tires.
For the half year, Cooper reported operating earnings of $63.5 million on sales of $887 million. While both were records—largely caused by the consolidation of its Standard Products Co. and Siebe Automotive acquisitions—the earnings ratio was only 7 percent, well below the double-digit margin to which Cooper investors are accustomed.
Cooper´s acquisitions last year of Standard Products and Siebe Automotive shifted its revenue mix away from the successful, high-margin, replacement tire business toward cyclical, lower-margin, engineered products, a development that has "not been viewed favorably by investors," according to the report.
Still, it said Cooper´s North American replacement tire shipments have grown an average of 6-7 percent annually, "significantly outpacing the industry´s average growth rate of 2-3 percent." It estimated the tire maker´s share of the U.S. replacement market has risen to about 14-15 percent as of 1999—up from 10-11 percent in 1990.
Cooper appears to have corrected its lack of top-tier branded products with the February 1999 alliance under which Cooper will distribute and market Pirelli Tire North America passenger and light truck tires in the North American replacement tire markets.
However, Pirelli´s sales were down last year—``by design," the company claimed—as it gave up its low-end product margins and hoped for the broadened dealer base the Cooper alliance promised to provide. Sales fell 12.9 percent to $172 million, and the firm was in the red for the 10th time in the past 11 years.