ROCHESTER HILLS, Mich. (Dec. 20, 2004) — This year was a really busy one for most people in the truck tire business: Tire sales were up, retread plants were humming, fleet managers seemed to be in better moods.
But prices for tires went up, making selling more challenging; new tire orders seemed to be on backorder all the time; and the cost of running your business just seemed to escalate.
If you're wondering why, take a glimpse back in time with me and let's see what happened to shape the challenges you faced. Who knows, maybe we'll learn something.
Tons of fun
It seems like the pent-up demand over the previous three years finally burst and the economy exploded in 2004. Last year at this time trucking was just beginning to see better freight volumes as the economy began to start growing again.
Throughout the year it continued to gain momentum with manufacturing growing nearly 5 percent. Manufacturers—trucking's largest customers—boosted production levels significantly in 2004, and this industry is having the best year since prior to the recession.
Through August, truck tonnage was up roughly 7 percent compared with the same period in 2003. This is the best rate of growth since the late 1990s. (Yearly tonnage growth has averaged only 1.3 percent since 2000.)
This fall freight season should be the best ever. Retailers expect holiday sales to grow around 4.5 percent from last year and slightly down from 2003's rate of increase. That's due, in part, to high energy prices, but still is quite strong. This is great news when you consider that 25 percent of all retail sales take place between Thanksgiving and Christmas, and this is a vital season for trucking.
Total consumer spending should increase 3.4 percent in 2004 and real gross domestic product should grow at a 4.4-percent annual rate compared with the 3 percent pace it set in 2003.
Due to this increase in business, trucking revenues also are increasing robustly and were up around 5 percent in October and still accelerating. Revenues also were positively affected by freight rate increases and fuel surcharges that stuck throughout the year.
Rates were not eroded due to the tight capacity situation that currently exists in the trucking industry. Profits for publicly traded truckload (TL) carriers were up nearly 50 percent through October vs. the same period a year ago. For the first time since deregulation (1980), truckers were able to pass costs and margin growth through to shippers.
Along with the booming economy, new truck and trailer sales have exploded as well. U.S. retail sales of Class 8 trucks for the first 10 months of 2004 increased 42.6 percent over the same period in 2003 to 163,582 units. October's gain marked the 12th consecutive monthly increase.
The need to replace aging fleets, ease of low-cost financing and a more generous tax depreciation schedule for equipment is fueling this market, in addition to the strong economy and associated high freight volumes.
It is expected that by the time the ball falls in Times Square, 2004 will see final sales of 240,000 to 260,000 new Class 8 trucks sold in North America. This would be an increase of 44 percent over 2003. This is despite the fact truck prices have increased between $1,000 and $1,500 because of a jump in the price of steel.
It is expected that trailer manufacturers will produce between 230,000 and 245,000 trailers this year. In contrast, manufacturers shipped 183,163 trailers in 2003.
Fewer mergers, big fuel costs
There weren't many large fleet bankruptcies, mergers or sales this year since most of the fleets that survived the recession came out stronger in 2004 and the upswing in the economy helped almost everyone.
However, one fleet of note, New Jersey-based Guaranteed Overnight Delivery (G.O.D.) halted its LTL operation in October in the competitive Northeast market, which has been consolidating over the last 10 years.
In late 2003 Yellow Corp. purchased Roadway Corp. to form a combination that many analysts thought was doomed. The combined company, Yellow Roadway Corp., benefited from the accelerating economy, tight industry capacity, higher freight rates and a change in the hours of service regulation. That change shifted a significant amount of truckload freight to the LTL sector.
The company proved the analysts wrong by posting third quarter profits that were double last year's. It also made some significant cost-saving changes and expects to reach its stated goal of saving $100 million in the first year as a combined company.
The price of diesel fuel—the trucking industry's highest operating cost after labor—went through the roof in 2004. After declining in price in the summer of 2003 following the invasion of Iraq, diesel fuel prices really began to escalate at the beginning of 2004. The average price for retail diesel fuel set record highs for the seven weeks starting Sept. 13, peaking at $2.212 on Oct. 25. This was 72.5 cents higher than at the same point last year.
The root cause of these escalating fuel prices is global demand for energy. Global demand has now nearly matched global production capacity, leaving little flexibility to respond to even minor supply disruptions. Any setback in oil supplies, whether real or perceived, can have an exaggerated impact on oil prices.
Issues that can affect prices range from tax problems of a major Russian oil firm, turmoil in Nigeria, instability of the Iraqi infrastructure, concerns over lack of oil sector investment in Venezuela, to escalating tensions in Iran. Normally these things would have a relatively minor impact if global inventories were higher or there was more spare capacity available.
Hardest hit have been owner-operators who were not able to deal with the escalating prices. This summer truck repossessions climbed 33 percent between the first and second quarter—when truckers were battling rising fuel and insurance costs—but dropped 70 percent in the third quarter.
The political scene
As you well know, President George W. Bush won a second term in office in November, and the Republicans expanded their control of Congress. Though defeated in the election, Massachusetts Sen. John Kerry retained his Senate seat. Republicans gained four seats in the Senate to create a 55-44 split, plus one Democrat-leaning independent.
The results of the election should bode well for both the trucking and tire industries because of a general tendency for Republicans to favor business issues.
As one of its final acts before adjourning ahead of the elections, the 108th Congress voted for the sixth time to extend previous funding levels until April 2005 for road and bridge programs in the Transportation Equity Act for the 21st Century (TEA-21). It had been set to expire in September 2003.
Meanwhile, the House and Senate are trying to agree on funding levels for the next six years. The Senate wants to spend $301 billion and the House wants to spend $299 billion. President Bush has said that he would veto any highway bill with a price tag of more than $256 billion. Clearly the expansion of Republicans in Congress strengthens President Bush's position about fiscal conservatism and could change the funding levels each body of Congress previously was seeking.
In January new hours of service regulations went into effect that allow drivers an extra hour behind the wheel each day, but trimmed the number of consecutive hours they can work. In July a federal appeals court struck down the new rules, saying the Federal Motor Carrier Safety Administration (FMCSA) had not considered adequately the rules' impact on drivers' health as required by Congress.
Congress extended the existing work rules until new ones can be devised that address the court's concerns. Productivity losses due to the new hours of service rules are running at about 3 percent according to industry data—far below the 19-percent losses feared by many ex-perts. On the bright side, the new rules have improved freight efficiency through-out the supply chain as shippers have be-come more efficient and cognizant of delaying drivers due to the penalty charges they incur. Detention charges as high as $440 a day for a single trailer have gotten shippers' attention in a hurry. But the industry still needs more drivers, and these rules constrain capacity further.
The tire scene
While it was an eventful year for trucking, it was no less fascinating in the tire industry.
Due to the boom in the trucking industry, it is expected that replacement medium truck tire shipments will grow 3.2 percent to 16 million units in 2004. Original equipment truck tire demand is pushing shipments up by nearly a third this year to 5.5 million units. (If you're wondering why your tires are backordered from your tire supplier, the answer lies here.) The retread market should come in around 16 million units.
Rising raw material costs continued to plague the industry and greatly impacted tire company bottom lines. While the price of natural rubber leveled off during the summer, the costs of steel and petroleum-based products such as synthetic rubber, carbon black and chemicals as well as most other commodities continued to escalate throughout the year.
Manufacturers battled these financial foes by finding ways to operate more efficiently, cutting other costs and through additional tire price increases.
Almost all tire companies increased prices at the beginning of the year.
Many including Bridgestone/Firestone, Cooper Tire & Rubber Co., Kumho Tire U.S.A., Hankook Tire America Corp., Pirelli Tire North America Inc. and Michelin North America Inc.'s Michelin Retread Technologies Inc. (MRTI) unit raised prices mid-year. Of late Continental Tire North America Inc., Yokohama Tire Corp., Pirelli and Hankook have announced end-of-year price increases as well. There probably will be more to come from the rest of the tire and rubber companies.
Many new things debuted at Bridgestone/Firestone in 2004. The most noteworthy was John Lampe's well-deserved retirement after serving as CEO for the previous three years and the passing of the torch to Mark Emkes, formerly chairman, CEO and president of Bridgestone/Firestone North American Tire L.L.C.
BFS's parent, Bridgestone Corp., also introduced several Bridgestone-brand radial truck tires this year: the R287 steer tire; the M726 EL drive tire that sports a 32/32 inch tread; and the R195F trailer tire. It also launched its Greatec wide-base radial truck tire in North America. This tire is Bridgestone's competition for Michelin's X-One wide base tire.
In 2004 Cooper Tire began importing medium truck radials produced for it by China's Hangzhou Zhongce Rubber Co. Cooper announced it hopes to source up to 350,000 truck radials a year from China and has plans to capitalize on that country's production capabilities as well as its growing tire market.
Goodyear had a really tough year in 2004. After many accounting troubles, the company finally reported its 2003 financials in May which included a loss of $802.1 million—though this was down from a $1.2 billion loss in 2002.
However, Akron-based Goodyear had some really welcome success this year, too. Its third quarter financials reported a profit for the company as well as for its North American Tire unit for the second consecutive quarter. While it still must be vigilant in operating its business, it can now tell critics who predicted its imminent bankruptcy last year to “shove it.”
Michelin waged its war with the United Steel Workers of America (USWA). The union struck the tire maker's Kitchener, Ontario, plant for three weeks in August before ratifying a new two-year deal. In addition, 3,400 unionized BFGoodrich workers in the U.S. ratified a new master contract that provides sought-after job security for union members and cost cuts for Michelin.
MRTI expanded both its operations as well as its production capability in 2004. It added new franchisees Canadian Treads Corp. of Edmonton, Alberta, and Raben Tire Co. Inc. of Evansville, Ind.—both of which expanded their operations to include MRTI facilities. Strouhal Tire Inc. of Hungerford, Texas, and Piedmont Truck Tires Inc. of Greensboro, N.C., switched from Bandag Inc.'s process. So MRTI has nearly 30 franchisees in North America operating 50 plants using the Michelin system.
The company also announced in June that it was doubling capacity for “Pre-Mold” precured tread rubber at its Covington, Ga., tread rubber plant to meet increased demand. The expansion will include capacity for wide treads designed for Michelin's X-One wide base tire.
Bandag took a major hit this year when Yellow Roadway decided not to renew Roadway's outsourcing agreement that, since 1999, had put Bandag in control of all tire functions, from inventory to maintenance. Instead, Yellow Roadway expanded its relationship with Michelin to supply more than half of the trucking company's tires.
However, in an effort to carve out another piece of the truck tire industry, Bandag purchased 87.5 percent of Speedco Inc., a quick-service truck lubrication business with 33 locations, for $56 million. Bandag expanded Speedco to include tire sales of Goodyear, Michelin and Yokohama brands as well as Bandag retreads.
When the dust finally settled in a battle over which firm the U.S. Postal Service (USPS) would use as a retread supplier, Cooper's Oliver Rubber Co. subsidiary was awarded the 10-year contract to retread all the fleet's tires nationwide.
Oliver will meet its contract obligations by using its approximately 150-160 independent dealers across the U.S. using both mold-cure and precure technologies. The USPS purchases about 100,000 retreads annually but wants to increase that number significantly if possible.
Marangoni Tread North America Inc. continued to grow in the North American retread market. It signed two more franchisees in 2004: Brahler's Trucker's Supply Inc. in Jacksonville, Ill., and Tire Treads Inc. in Jackson, Tenn., bringing the number of Marangoni's North American franchise customers to 16.
To handle its growth in the market, the company opened a $10 million, 50,000-sq.-ft. tread rubber plant in Madison, Tenn., in April to manufacture its patented Ringtread spliceless precured tread rubber.
After three years in the red, Yokohama Tire Corp. reported it was back in the black. Higher truck and bus tire unit sales, as well as increased performance tire sales in addition to controlling costs were the keys to its success.
On the association front
TIA also made headlines this year. It sold its Louisville, Ky., office and training center and has taken its training program on the road rather than requiring dealers to send employees to Louisville.
However, this sale did end an era in the history of the former American Retreaders' Association and International Tire & Rubber Association, which used Louisville as their headquarters location.
To help with the training effort, TIA hired Jeff Faubion as its director of tire service. Mr. Faubion is based in Denver where he conducts instructor training courses for both the Automotive Tire Service and the Commercial Tire Service programs and coordinates the “Truck Tire Training Tours” that travel the U.S. for dealer training.
Kevin Rohlwing, TIA's senior vice president of education and technical services, moved to TIA's Maryland headquarters office from Louisville and now conducts instructor programs in Baltimore as well.
TIA and the Rubber Manufacturers Association (RMA) joined forces to advance a common policy agenda for the tire industry and work on issues of mutual concern—such as compliance with the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act, tire pressure monitoring system training and motor ve-hicle inspections.
The TREAD Act continued to dominate the scene in Washington from a tire industry standpoint. The hot issue this year was tire pressure monitoring systems (TPMS). As you may recall, in 2003 NHTSA was told by the Second Circuit Court in New York to rewrite its regulations on TPMS since the indirect monitors it allowed were deemed to not be effective.
So it rewrote its regulations for direct systems only. Under the proposed rule, new vehicles with a gross vehicle weight rating of 10,000 pounds or less must be capable of detecting any tire that is inflated 25 percent below the recommended pressure. Systems are required on at least half of each car maker's new models starting next September and will ramp up to 100 percent fitment by September 2007.
Replacement tires are exempted from the rule. TIA and RMA as well as Advocates for Highway and Auto Safety voiced their opinions that the 25 percent threshold is too great and tire pressure that low would be insufficient to bear the vehicle load and would not enhance safety. RMA and TIA instead called for a minimum reserve pressure requirement of the 25 percent threshold. They also believe exempting replacement tires is basically stupid since four times as many replacement tires are shipped every year than original equipment tires.
As a result of the battle over auto and light truck TPMS, work on writing regulations for commercial truck systems has been pushed back.
Wow! A lot of things happened in 2004. Most of them were good from a tire business standpoint but also created a lot of challenges for most of us.