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Hot-button issue brews: Low-cost imports a threat or bonanza for commercial dealerships, retreaders

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AKRON (April 12, 2004) — Statistically speaking, the trucking industry is on the upswing. Tonnage shipped is rising. Sales of new trucks have risen four straight months. Fleets are leasing trucks and trailers in record numbers.

While there's no denying that trucking activity is on the rise, there's also no denying that costs are rising, too, and quite possibly faster than revenues.

Trucking analyst Edward Wolfe, for example, told those attending a recent National Industrial Transportation League meeting in Arlington, Va., that motor carriers are in for a tough year cost-wise because of rising fuel prices, new driver hours-of-service rules and difficulties in finding qualified drivers.

The market may see a resurgence in the number of independent truckers, Mr. Wolfe said, because of the new hours-of-service rules and changes in the insurance industry that make going independent more affordable. Mr. Wolfe is a senior managing director at Bear Stearns & Co. in New York.

The amount of tonnage shipped by truck was up in February, for the fifth time in six months, according to the American Trucking Associations' (ATA) seasonally adjusted Truck Tonnage Index.

ATA Chief Economist Bob Costello said he believed that retail sales and the strength in the manufacturing sector were the primary reasons why tonnage grew in February, both on a month-to-month and year-over-year basis.

Trucks hauled 8.9 billion tons of freight in 2002, the ATA said, or more than two-thirds of tonnage carried by all modes of domestic freight transportation. Motor carriers reported $585 billion in revenue in 2002.

Improved business for truckers should result in more business for tire dealers and retreaders. Shipments of new replacement truck tires grew 5.4 percent last year, to 15.5 million units, and are forecast to grow 2 percent a year the next few years, the Rubber Manufacturers Association said, while original equipment demand is growing at nearly 15 percent a year as sales of new trucks take off.

Likewise, shipments of tread rubber are seen growing 2.3 percent the next several years, keeping retreads ahead of new tires in the replacement market.

U.S. production of medium and wide-base truck tires was up last year for the first time in several years, while imports slipped by 1.7 percent.

Imports account for more than half of the U.S. truck tire replacement market, according to available industry and government data, with shipments from the Far East accounting for more than half of imports. China alone shipped more than 1.7 million units to the U.S. last year.

Dealers surveyed by Tire Business viewed imports from the Far East as both a threat and an opportunity—depending on whether the dealer is selling them or competing against them.

Several dealers indicated low-cost imports are both an immediate and long-term threat to the commercial tire retreading industry. Immediate because customers can buy new tires for a price close to or equal to that for a retread. Long-term because the growth of lower quality imported tires will have a negative effect on the supply of retreadable casings, said Greg Trum of Cross-Midwest Tire in Kansas City, Kan.

The number of tires coming from China is destined to continue increasing, as domestic producers turn more to offshore sourcing. Cooper Tire & Rubber Co., for instance, is turning over all of its medium commercial radial tire production—250,000 to 350,000 units annually—to a Hangzhou Zhongce Rubber Co. Ltd. in Hangzhou, China.

Among individual independent dealers, Les Schwab Tire Centers Inc. edged out Canada's Kal Tire by a narrow margin to retain the top spot in Tire Business' annual ranking of commercial dealerships, $254.9 million to $244.2 million.

Canada's Tirecraft Auto Centers Ltd., which has ventured deeper into the commercial business in the past few years through acquisitions and startups, moved up to No. 3 from No. 6.

Missing from the rankings, but not from the minds of their competitors, are Best One Tire and Southern Tire Mart L.L.C.

Best One, the multiple-dealership amalgamation headed by Paul Zurcher of Monroe, Ind., reports annual sales of about $600 million, but the closely held company does not break down its sales by category—retail vs. commercial vs. wholesale, etc.

Best One expanded its commercial network last year by at least six outlets, which it acquired from Bandag Inc.'s Tire Distribution System (TDS) subsidiary along with three retread plants. The firm's Web site shows 112 commercial outlets in 10 states. Included in the network are several companies that could have ranked on their own merits, including Tommy House Tire Co., S&S Tire and Southern Indiana Tire Inc.

Reflecting the company's size, its retread arm—previously known as Premier Bandag but now doing business as Best One Group—is ranked as the fourth largest retreader in North America with production of 1,900 units a day at 16 retread plants.

Southern Tire Mart in Columbia, Miss., came into being part way through the year after its owners, Thomas and James Duff, bought back from Bandag a large part of the business they had sold to the Muscatine, Iowa-based retread systems supplier in 1997.

Southern Tire Mart started business in May last year with 14 former TDS stores and six retread plants—seven and three each in Louisiana and Mississippi—which collectively represented $60 million to $65 million in annual sales. The Duffs' deal also includes an option to purchase 10 TDS outlets and five TDS retread plants in Texas during an 18-month period starting in the fourth quarter.

There are two newcomers to this year's rankings—Consolidated Tires Inc. of Greenville, S.C., at No. 30 and Trans American Tire of Fort Smith, Ark., and No. 33. Trans American's growth over 2002 benefited to an extent from its purchase in mid-2003 from TDS of five outlets, three of which are combined with retread plants

In general, 2003 was a solid year for most commercial dealers. Only two of the 35 ranked this year reported lower sales than in 2002.

Commercial Group Inc. of Forest Park, Ga., jumped 11 spots on the TB ranking to 21st based on 72-percent growth. The firm, which does business as Atlanta Commercial Tire, Macon Commercial Tire, Mid-Georgia Commercial Tire and North Georgia Tire, added two TDS commercial outlets and a retread/commercial location in Atlanta in late 2002.

Brandwise, Michelin and Bridgestone were the most popular, being named by 29 and 27, respetively, of the 35 largest independents as one of their brands. Firestone is sold by 26 dealerships, followed by Yokohama (23), BFGoodrich (19), General (16), Continental (15) and Goodyear (14).

As for the tire company-owned commercial networks, Bridgestone/Firestone's GCR Truck Tire Centers and Goodyear's Wingfoot Commercial Tire Systems L.L.C. continued to wield influence with 150 and 170 locations, respectively, and estimated sales exceeding $500 million each.

Michelin North America Inc.'s TCI L.L.C. also continues to grow, adding one retread plant last year—its 14th—to go with more than 125 commercial tire centers. Sales are in the $400 million range.

With the sale or closing last year of 27 locations, Bandag's TDS saw sales drop 34 percent to $241.7 million. Retread production fell 35 percent to about 14.6 million pounds.

Retreading—ebb and flow

From a retreading system supplier perspective, the major players' presences continue to ebb and flow.

In the past year, Marangoni Tread North America Inc. picked up three new Ringtread System (RTS) licensees—bringing to 12 the number using the system in North America—and began work on its own tread rubber plant in Madison, Tenn.

Michelin Retread Technologies Inc. (MRTI) recently marked the signing of its 25th franchisee in the U.S. and Canada—Piedmont Truck Tires Inc.—and said it expects another 11 to come on stream this year. At year-end 2003, the 24 MRTI franchisees operated 46 plants; included in the total were 14 plants operated by TCI.

MRTI also has three franchisees in Mexico, including the latest to sign on, Mil Neumaticos Solucion S.A. de C.V. in Mexico City.

Michelin sought last year to boost demand for MRTI retreads by expanding the sales network for the product. It created a Michelin Retread Associate Dealer Program, allowing Michelin new-tire dealers to sell and service Michelin retreads and tap into MRTI's marketing support.

The program was expected to expand MRTI's distribution network to as many as 1,500 points of sale from 200, but several MRTI franchisees indicated they hadn't seen much change in the program's first year.

Bandag reported a 4-percent increase last year in revenue from tread rubber sales to its independent franchisees in North America, to $343.7 million. But that increase came from the effect of a price increase in January 2003 and a favorable Canadian-U.S. dollar exchange rate. Volume sales of tread rubber fell 5 percent last year vs. 2002.

Truck tires retreaded by the Bandag franchisees made up approximately 23 percent of the U.S. medium and wide base commercial tire replacement market, the company said, down 1 percentage point from 2002.

More recently, Cooper Tire's Oliver Rubber Co. subsidiary was awarded a 10-year contract to retread all the U.S. Postal Service's (USPS) tires nationwide.

Oliver will fulfill the contract via its approximately 150-160 independent dealers across the U.S., using both its mold-cure and precure technologies, according to Phil Boarts, Oliver director of sales and marketing for retread products. The contract may cover as many as 100,000 retreads a year initially, but the USPS has indicated it wants to increase the use of retreads on its fleet of more than 200,000 ground vehicles to 70 percent from about 20 percent currently.

Most Oliver dealers contacted by Tire Business said it was too early to gauge what effect the contract might have for them.

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