Goodyear is warning car makers it will stop supplying tires at a loss and said it may move more private brand tire production overseas.
The tire maker is considering cutting its domestic shipments to the lower-profit, original equipment market by as much as 24 percent during the next three years, a company spokesman said.
``We don't wish to continue indefinitely with some unprofitable business,'' he said.
Exactly what actions Goodyear will take still are in the ``thinking stage,'' he said, and probably will be phased in gradually as supply contracts expire.
Analysts expect Goodyear to discuss its strategies for long-term growth in more detail at a Feb. 8 meeting in New York.
``It's no secret that the OE auto tire business is unprofitable in aggregate, but not every tire line loses money,'' Wendy Beale Needham, an analyst with Credit Suisse First Boston Corp., said in a recent report on Goodyear.
The tire maker supplies about 42 percent, or 22 million of the 55 million to 60 million tires going to the North American OE tire market, according to the analyst. Of those, high-performance tires and those fitted on sport-utility vehicles generally have better margins.
Ms. Needham quoted Goodyear Chairman Sam Gibara as saying the tire maker could reduce its share of the OE market by seven to 10 percentage points during the next three years ``unless it gets price relief from unprofitable tire lines.''
That share would equate to 4 million or 5 million tires, or 17 percent to 24 percent of Goodyear's total OE tire production, Ms. Needham said.
The agreements Goodyear reached with its unions in November give it the ability to reduce its workforce, thereby allowing the company to cut capacity as it trims its OE sales, she said. ``In other words, Goodyear now has the flexibility to let supply contracts expire if the auto makers won't raise prices,'' Ms. Needham said. ``That is a subtle shift in the balance of power between auto makers and tire makers.''
The possibility of scaling back low-end sales to the OE market is part of a larger plan Goodyear is putting in place to improve its margins, Ms. Needham said.
The tire maker is thinking about shifting production of its low-margin associate and private label tires to low-cost production sites within its own operations, or to other makers in China or South Korea, she said.
Outsourcing production to an offshore tire maker would further reduce Goodyear's North American asset base.
Goodyear did not comment directly on Ms. Needham's private brand observation.
Goodyear's profit margins also could go up if it is successful in supplying a complete tire system composed of the tire, a pressure sensor and a tire pressure monitor to car makers. ``Though Goodyear isn't saying how it plans to price these new tire systems, we expect the tire systems to command a higher price and a higher margin than the standard tire,'' Ms. Needham said.
Goodyear is seeing increased OE interest in its run-flat tires, with contracts to supply about 1 million Extended Mobility Tires in 2002 and ongoing negotiations with BMW A.G. to supply the run-flats for its 3-, 5- and 7-series vehicles as soon as the 2003 model year.
Design modifications that have decreased significantly the weight of Goodyear's EMT and the cost to only a 10-percent premium over conventional tires have helped fuel interest in the tires and could make them more palatable to the aftermarket, Goodyear is hoping, she said.
The tire maker is considering re-launching its run-flat in the replacement segment.
``A successful aftermarket campaign could create consumer demand for installation on new cars, and that could lead to better margins at the OE level, as well,'' Ms. Needham said.