AKRON (Feb. 5, 2004)—Tire price increases for the original equipment market aren't frequent, but industry analysts say even auto makers sometimes feel their suppliers' pain and agree to pay more.
Michelin North America Inc. and Bridgestone/Firestone North American Tire L.L.C. each announced price hikes for OE customers in December, resulting primarily from ever-rising raw material costs.
Greenville, S.C.-based Michelin said it will raise passenger and light truck tire prices for the North American market during the first quarter of 2004. BFS said it planned to increase OE and replacement tire prices Jan. 1 for both the U.S. and Canada by up to 5 percent.
While Michelin wouldn't detail its price hike decision further, BFS said the increases—on its top, associate and private brands—would vary from customer to customer. The Nash-ville, Tenn.-based tire maker said raising prices is necessary to help offset raw material costs, which have surged an average of 20 percent since mid-2002.
Price increases in the competitive automotive arena are unusual, said Dennis Virag, managing director of the Automotive Consulting Group Inc. in Ann Arbor, Mich. Tire makers, however, are dependent on raw material costs, he said, and oil—which has seen a substantial increase over the past six months—is a big one.
“The OEs are always hesitant to give up increases, but they realize their suppliers can only absorb so much themselves,” Mr. Virag said. “So sometimes they reluctantly agree to do it.”
Announcements like these buck the trend of lower prices for the OEMs, but they reflect the cost pressure on suppliers, said Efraim Levy, an automotive industry analyst with Standard & Poor's in New York. In cases where key suppliers are distressed, it makes sense to make some concessions and keep supply flowing, he said.
“It will cost more in the long run due to a lack of a part,” he said.
Mr. Virag said the agreements between auto makers and suppliers often have clauses addressing raw material inflation that can spur hikes or at least contractual discussions. “If the auto makers aren 't willing to accept changes, they could put their suppliers out of business,” he said. “They don't want to do that.”
It's “up to the General Motors and Delphis of the world” at the top of the chain to help keep the suppliers viable, Mr. Levy said. “(Auto makers) have to put tires on cars, too. They can still make a reasonable profit.”
Mr. Virag stressed these kind of price increases on the OE side are sporadic rather than trend-setting. “There still has to be justification for it, and it has to substantial,” he said. The auto makers remain tough, but “realistic,” he said.