Tire Business talked with Darren Thomas, Senior Vice President of Sales and Marketing for Falken Tire Corp., a unit of Sumitomo Rubber North America Inc., about his thoughts on the tire industry and how his company is performing heading into the second half of the year.
Q : How would you describe the tire business in the U.S. so far?
A: In terms of demand, it has been stable. There's been noise, but we will call that "noise without action," so the consolidation in the market is just a bunch of noise, a way to get people talking that may or may not manifest itself into something bigger. Excluding Goodyear's actions with ATD, the majority of the dealer base and overall demand have both been stable.
Q: Have you seen any surprises this year?
A: The three little mergers/acquisitions are all surprises. The Michelin/TBC one actually makes a lot of sense to us simply because, on a financial level, TBC was the largest overall asset of Sumitomo Corp. (a totally separate entity from us). So, for them to divest a portion of that investment to Michelin, who always strives to be closer to the retail transaction, makes sense.
How that affects TCi and their strategy wholesale still remains to be seen because TCi and Carroll Tire went to the market very differently. It is yet to be seen how brands start to align themselves with those channels and how TCi treats those brands.
In our opinion, TCi has always been a bit more aggressive with products that are not wholly owned by Michelin, so it will be interesting to see how they conduct themselves in the market. As of now it's just a watch-and-see situation though we would expect them to be very competitive because that is why you create an endeavor such as this.
Q: Do you expect to see more joint ventures and mergers?
A: Yes, we believe a lot of things are going to fall into place. The question is how many of them happen out of haste and, really, what the long-term game plan is because even from our end, we don't quite see the logic between a Bridgestone-Goodyear joint venture.
We see those two as worldwide competitors, so in the largest market in the world, for them to become a joint venture seems odd to us. And we've never seen 50-50 work out well, especially when its 50-50 between two of the biggest competitors in the world. It's going to be interesting, but I think there's a story yet to be told there.
At this point in time, the biggest surprise is how quickly Goodyear made a stand, essentially against ATD, and the repercussions of that are interesting because Goodyear essentially, in our opinion, did that before they were prepared to what I'll call "actually service the customer."
The independent tire dealers found themselves with less options to buy Goodyear than they had the day before it was announced; that's not a good thing for the actual consumer or the independent dealer.
Q: Where do you see the market heading the rest of the year?
A: Well, we don't expect any surprises. We're at full employment right now, about 3.5 to 4 percent, and interest rates are steady. Barring anything that's outside of anyone's control, things continue look very stable.
Q: What trends are you seeing in the marketplace?
A: Other than the obvious, consumer preference shift to CUVs, Ford's decision to do away with anything based on a car platform, virtually shifting everything to CUV, was interesting to us. Primarily because we see Toyota, Hyundai and Honda absolutely taking that sedan market by storm. It leaves us curious why the domestic manufacturers would completely walk away from it, but it may be a great strategy if that's where their strength is.
Other than that, the real trends we're interested in watching are all the moves that are less product-based and more distribution-based as second-tier companies now start to evaluate their distribution options long-term. That will be the biggest paradigm shift we see over the next 12 months. It's not going to be related to products in the marketplace.
Q: How is Sumitomo reacting to this trend?
A: Sumitomo Rubber North America has a very strong independent dealer base. Our independent dealer base is fragmented, which is good. We have a very great relationship with ATD, so it's in our interest that they survive.
Ultimately what we are going to watch is the balance between the strength of the manufacturer and the strength of the distributor, and right now both parties need each other. Because the first tier is going to create its own channel, which it is starting to, right? TireHub and NTW, is an example of the first tier creating its own path to the market. Doing that, they become less aligned with regional distributors. Therefore, regional distributors need brands and the brands that remain are second-tier brands.
The second-tier brands are going to need options in the event that something happens to ATD. As much as we love ATD and have a great relationship with them, anyone who loses 50 percent of their business because of a change in the market is going to have challenges. Can they make adjustments? Of course they can, but over time, obviously, any good company is going to have countermeasures and other options. Those other options are simply going to be regional distributors. So the regional distributor is going to become more important. Not that they aren't important now, but they will become vitally important.
So, both second-tier and regional distributors are going to be in a lot of conversations over the next 12 months all trying to hedge their positions.
Q: Is Sumitomo hoping to fill the void of Goodyear products no longer sold through ATD?
A: Falken brand is essentially always sold to ATD. Our products are relatively price-positioned and do not necessarily compete against Goodyear's products.
I would say that Goodyear is the least disciplined in their pricing model, which means that in any particular segment they will operate from a price index of 100, which is where they should be, down to 65 with other Goodyear products. And when they go down to somewhere between 65 and 85, now they're in the Falken price zone, or they're in the second-tier price zone. You do not see that occur with Michelin, you do not see that occur with Bridgestone.
Goodyear is the only one that has a very, very wide pricing window. There will be some places like light truck and SUV where the Falken brand actually does challenge Goodyear pricing, and we believe we're going to receive some of that business.
Tires are channel specific, so if those were Goodyear retailers that were beholden to the Goodyear brand, they've got a bigger paradigm shift than just to look at Falken vs. Goodyear. They've got a bigger decision to make, and all brands will be looking at that.
Someone is going to fill that void in the event Goodyear can't circle back with the regional distributors and get service to those customers.
In the short term, Goodyear did not have enough distribution in place to fill the void. So ATD is going to need something because they're going to have demand, and Goodyear can't respond quick enough. We're definitely hoping that dealers that were buying Goodyear at that 75 percent index price will consider our brand.
Q: What tire sectors are looking strong this year?
A: Everything from touring to ultra high performance is now becoming one blurry segment. I would call it the traditional grand touring segment, which is now everything T, H and V (rated), 50- and 55-series. Those products are sellingvery well. All-terrain continues to be a great segment.
Medium truck is doing very well right now. We just don't see any segment that is really struggling. All the segments are behaving in predictable ways right now. For us the light truck market continues to be strong because previously we didn't have a large share, (and) now we have one of the best tires in the market and it's doing great for us and our distribution.
Q: Is the popularity of CUV/SUVs impacting the UHP market?