Tire manufacturers and dealers will have to dance as fast as they can in the current business and economic climate, according to three perennial speakers at the Clemson Tire Conference.
The economic downturn of last year has already ended, but any upturn will be unusually short because the economy is already starting to overheat, according to George Dagnino, former chief economist at Goodyear and now chairman of Peter Dag Strategic Money Management in Akron.
There is greater liquidity in the U.S. economy because of the Federal Reserve's zealous printing of money, Mr. Dagnino said at the March 20-22 conference in Hilton Head. ``The sharp rise in the money supply caused the turnaround,'' he said, but along with that are signs of increases in both interest rates and commodity prices.
``As soon as interest rates and commodities rise, after a while things turn negative,'' said Mr. Dagnino, whose chief message as an economist is that the economy goes in predictable cycles.
At this point, inventories are extremely low, wages are stable and interest rates are down, so profits are getting better and a new cycle is starting, according to Mr. Dagnino. But interest rates are already climbing back from rock bottom, and prices of commodities such as crude oil and natural rubber are on a sharp upswing, he said. Before long, wages will follow, combining with the other factors to create an overall increase in the cost of running a business.
``The stronger the economy, the more profits get squeezed,'' he said. ``Unfortunately, this is hard to sell to management.... People don't react to facts, but to what's happening now, which is the wrong way to do it.''
For interest rates and raw material costs to go down again, there will have to be a weaker economy, and that won't occur before a one-year slowdown in the money supply does, Mr. Dagnino said.
Most people still don't even believe that the downturn is over, he said. ``All the executives are saying that business is very bad.
``In a year, you'll be running out of capacity and people, and raw materials and interest rates will be much higher. You have to start thinking now about capacity because when business is booming, it's too late. That's why business cycles exist, because it takes guts to think differently.''
Later, in the question-and-answer session, Mr. Dagnino said he thought the formation of the International Tripartite Rubber Organization among Thailand, Malaysia and Indonesia would make no difference whatever in the long-term price of natural rubber. He cited a study several years ago from the Federal Reserve Bank of San Francisco that showed cartels add volatility to prices, but make no lasting changes.
Those tire and auto makers that expect surging profits from undeveloped areas of the world probably will be disappointed, according to Dennis Byrne, professor emeritus of economics at the University of Akron.
``The best prospects for growth are in Central and Eastern Europe,'' Mr. Byrne said. ``The growth will be uneven and take some time, but the prospects here appear bright.'' Also, South Korea has a very strong economy and shows real signs of taking off. But China-touted by many in U.S. industry as the next boom market-will be anything but, he added.
``Most of China's vehicle production is heavy-duty trucks,'' he said. ``There is no infrastructure there for a personal vehicle fleet, and average incomes aren't nearly large enough to support a car...The cities on China's coastline are strong, but the rest of the country is in the Stone Age.''
Similarly, Africa produces less than 500,000 vehicles annually, and the stagnant or declining economies of most countries there will keep auto and tire demand low, he predicted. The Middle East's political instability also makes for bleak prospects there, he added, although Turkey and Iran are partial exceptions.
Central and South America also won't show much growth. ``For as long as I've been an economist, everybody's said South America is it,'' Mr. Byrne said. ``It is a kind of never-ending promise, thanks to its population numbers, raw materials and resources. But it is very hard to find an area in South America that will take off.''
Brazil is far and away the most important economy in South America. ``When you talk South America, you talk Brazil,'' he said. ``It's the tail and the dog.''
It produces 77 percent of all vehicles in South America, and also is a tremendous vehicle and tire importer, according to Mr. Byrne. But while sales increased 25 percent last year, the vast majority of Brazilians-like the vast majority of South Americans-will remain very poor.
``There's an established `higher-level' economy in Brazil, but the vast majority of people there are not part of it,'' he said.
North American auto and tire makers are facing a wildly different market today than from a few decades or even a few years ago, said Michael Flynn, director of the Office for the Study of Automotive Transportation within the University of Michigan Transportation Research Institute.
``In the 1960s, the auto business was pretty simple and straightforward,'' he said. ``If you asked people then what they'd do with an extra $1,000, it was usually something to do with a car. Nowadays, that $1,000 would go toward computer equipment or home improvement.... Today's car buyers are not buying a lifestyle, unless maybe when they buy a BMW. In 1955, they were.''
There has been a fundamental change in the auto business, with products far more varied than they used to be, Mr. Flynn noted. At the same time, the Ford Motor Co.-Bridgestone/Firestone situation and other customer-supplier disputes created a much more acrimonious relationship between customers and suppliers than only a few years ago.
Furthermore, future sales prospects are not good, he said. ``We've stolen a lot of sales forward, thanks to zero financing.''
The proliferation of original equipment customers in the North American market-between 15 and 17, depending on how you count them-has created ``a competitive bloodbath'' and changed the structure of the industry beyond recognition, Mr. Flynn added.
``The Big Three is now the Big Five,'' he said. ``There's more competition, and you can't pass on costs because there are too many competitors.''
The changes in the industry are dictating changes in the supplier and dealer infrastructures in both autos and tires, with fewer, more tiered suppliers and fewer, larger dealers, according to Mr. Flynn. ``More and more, the Big Three will have to rely on supply chains, like Toyota and Honda.''