Mid-Year Report: Conti foresees ‘gradual' recovery in commercial unit

Continental Tires the Americas L.L.C. continues to ramp up its commercial tire business, which the company says remains strong compared with other years while in the midst of a recession. Paul Williams, Continental's executive vice president of commercial vehicle tires in the Americas region, told Tire Business that the tire maker has the capacity available to meet its customers' demands.

Q How would you describe business thus far in 2020?

A It has been an unprecedented year. Continental is one of the largest automotive technology suppliers and tire manufacturers in the world, and has certainly seen a global impact from the COVID-19 pandemic.

The commercial tire industry has not been impacted as severely as the passenger and light truck tire industry, with truck loadings down just 8% year-to-date. The current situation is not expected to be as severe as the 2008-09 recession, in terms of impact to the commercial tire industry.

Commercial tire replacement shipments in 2020 will finish down 7% year-over-year at approximately 17.6 million. To give some historical perspective, commercial tire replacement shipments during the prior recession finished at 14.8 million in 2008 and 12.8 million in 2009.

The prior recession saw the construction industry suffer severely due to the housing crash, while many tire manufacturers struggled with supply and pricing, contributing to the growth of low-cost imports.

If the unprecedented current scenario between COVID-19 and global recession still see the market finishing at 17 million truck tires or more, this is a win. Even if the effects from COVID-19 bleed over into 2021, overall, the commercial tire replacement industry in a much healthier place than a decade ago.

Our commercial specialty tire business, which includes agriculture, earthmover OTR and material-handling tires, started off the year very strong but we have seen some impact from the shutdowns and stay-at-home orders in April, with slightly more impact in May.

Fleets, while exercising fiscal responsibility, have shown great resiliency, particularly in our specialty tire segments where demand has persisted. Some prime examples are warehouse operations, aggregate producers and some construction work.

Q How has Conti reacted to COVID-19? What are some of the key measures you have taken to keep employees and customers safe?

A Since the outbreak of the coronavirus, Continental's main focus has been on the health of our employees and customers. In each of our locations worldwide, a site-specific hazard assessment has been conducted in order to implement suitable protective measures to ensure that our employees are safe at work during this pandemic.

These include a substantial increase in the frequency of cleaning, staggered shifts, social distancing markers and greater distance between seating in canteens and break rooms.

Wherever possible, we are asking employees to work from home or outside of our offices in order to minimize personal contact. In our manufacturing locations, we are supporting affected sites, for example by providing our employees with personal protective equipment where needed.

Q Do you expect any supply difficulties in the second half of the year?

A Continental has a large manufacturing footprint in the U.S. This has been leveraged especially on the commercial tire side, helping mitigate any impact to truck tire supply.

Our plant in Mount Vernon, Ill., is Continental's largest truck tire plant worldwide, with a capacity of more than 3 million truck tires annually. The plant suspended production for a short period to give us time to implement additional protective measures for our employees, and in line with demand.

The plant has already resumed production, and we don't anticipate any impacts to stock or availability this year for truck and bus radial tires.

We kept the precured tread rubber plant on the same Mount Vernon campus, which produces tread rolls for retreading, open throughout the entire period under the "essential manufacturing" provision. Due to differences in the production process for tread rolls, employees in that building were already socially distanced, so with increased sanitation efforts and following all CDC guidelines, we felt it was safe for our employees to continue working.

We also do not anticipate supply difficulties with our specialty tires. We keep adequate inventory in our U.S. and Canada warehouses, so we should be well insulated from supply shortages, even though we did have some short-term plant closures. Broadly speaking, we don't anticipate any supply issues.

On both the new tire and retread side, Continental is ready to supply our customers now and as the market continues to rebound.

We also see dealers working to deplete their on-hand inventory to preserve liquidity during the crisis. As the economy stabilizes, we expect to see additional orders as they replenish inventory.

We are working closely with our customers to prepare appropriately to meet their needs toward the end of the year. We anticipate a just-in-time inventory model being utilized by many of our dealers this year, so we're preparing ourselves to be able to provide the level of service and partnership required for that model to work efficiently.

Q What are some of the pleasant surprises you are seeing in the industry?

A One of the pleasant surprises for me has been the openness and willingness for our commercial tire customers to conduct virtual business. In a very traditional industry, it was a pleasant surprise to see the level of trust that our customers exhibited, allowing us to continue doing business with them and to share information throughout the crisis.

We have actually been able to spend more time in front of customers by using these virtual tools, since it eliminates the travel time. It's a testament to how adaptable this industry truly is. Of course, it wasn't really a surprise, but we also have to applaud the ways that our fleet and dealer customers are reaching out and doing good in their communities.

Q The USW has petitioned for antidumping and countervailing duties on passenger and light truck tires made in Thailand, South Korea, Taiwan and Vietnam. What is your company's reaction to that?

A As a company, we are in favor of free and fair trade. We respect the rights of all countries to investigate and take corrective action in the event there is evidence of unfair trade.

Q How might additional duties impact the industry?

A As Thailand, South Korea, Taiwan and Vietnam make up a significant portion of the total tire supply to the U.S. market, we would expect to see the larger global tire manufacturers operating in these regions to rebalance their supply sourcing approach for U.S. deliveries away from facilities in these regions.

This is similar to what happened when the tariffs on Chinese product were implemented. Therefore, manufacturers with less diverse manufacturing networks may have challenges. Continental is in a strong position as we are not reliant on sourcing from these countries to support our U.S. business.

Q Where do you see the industry markets heading during the second half of 2020?

A On both the commercial trucking and specialty tire side, we expect a gradual recovery toward the end of the year. Data from Freight Transportation Research indicates that for the month of April, loadings were down 13% year-over-year and tonnage down 11% year-over-year, the first double-digit decline since the prior recession.

The remainder of 2020 is expected to stay in the -7% to -10% range varying by month for both indicators. The USTMA's annual forecast for the year, as of May's adjustment, is in alignment with the aforementioned declines, with commercial tire replacement seeing a 7% decline year-over-year. We anticipate a steady recovery that will gain momentum as the year progresses.

Q What kind of trends are you seeing in the marketplace? How is your company reacting?

A During times like this, the benefits of having supply closer to the market is a big plus. We produce many tires in North America, for North America.

With COVID-19, we've all now experienced some of the negatives of the recent trend in global supply chains, and how they can be disrupted as a result of a regional or global event. Industries may start to think differently. To better protect themselves from future events, markets may start to apply greater controls.

With multiple plants already located here in North America, Continental is well prepared to supply the tires that our customers need, locally and of course to the benefit of market.

A consumer trend which has been accelerated by the pandemic is online shopping, leading to a massive increase in last-mile delivery demand, according to large players in that segment. People being quarantined in their homes with the inability or unwillingness to go to shopping malls, retail outlets and even grocery stores has led to increased business in home delivery.

For example, since March with implemented government lockdown restrictions, Amazon.com has hired 175,000 seasonal workers to meet the surging demands and plans to keep 75% of them permanently. Last-mile delivery and regionalized business has seen continual rise throughout the last decade, with no signs of slowing down.

Continental had anticipated growth in this segment, releasing a 16-inch all-steel retreadable tire, the Conti LAR 3, in 2018, designed specifically to deliver the lowest overall driving cost in last-mile delivery.

In our specialty segments, service is key. The new global environment demands that we find new and innovative ways to keep our service and support capability at a high level. Many meetings are moving to online platforms. One of the most effective initiatives that we have pursued has been online educational seminars that have helped serve as a bridge for customers when normal face-to-face contact is not practical.

Q What sectors look to be strong? Are they sustainable?

A In addition to last-mile delivery, refrigerated vans and food products are staying particularly resilient during the COVID-19 pandemic. The decreased demand from chain and local restaurants has been counteracted by the surge in demand for groceries. People still need to eat.

Loadings and tonnage for refrigerated vans with food products will be down by approximately 2% to 4%, but this is a far cry from other sectors such as flat beds, which are expected to be down 12% or more.

Off-the-road (OTR), agriculture and much of the material-handling business continues to be strong. The port business is strong in some areas depending on the mix of their products coming in and going out.

With a strong push for a renewed economic recovery and getting people back to work, these segments show potential for further growth during the coming recovery.

Q What sectors are struggling? How soon do you expect them to rebound?

A One obvious struggling sector is traditional brick-and-mortar retail stores, which consequently lower freight demands for trucking. While it is true that some traditional brick-and-mortar stores have online marketplaces, many were unprepared for this drastic shift with little to no online presence.

According to Google Ads Store Visit Conversions, store visits dropped from 91% at the end of February to just 10% by middle of March. Given the varying lockdown restrictions through May, it is safe to assume that many retail outlets remained in this low range.

Further evidence of decline is supported by Chase Bank credit and debit card data. According to Chase, spending in regular brick-and-mortar stores is down 35% from a year ago, with a low of -50%.

Public transportation by subway and bus also is struggling. According to statistics from Transit App Inc., nationwide subway and bus ridership demand has dropped by 75% versus normal conditions. Washington, D.C. has reported declines of 60% and New York City declines of 80% in regard to public bus transportation, with other transit systems reporting similar declines in large cities across America.

Many cities are also limiting the number of buses in use due to COVID-19 and the declining demand. The low ridership and lessened public bus transportation will certainly be felt in the urban segment of commercial tire replacement.

The energy sector globally has also been severely impacted by COVID-19, with fuel demand dropping by 30% worldwide. Streetlight Data Inc. statistics show an unprecedented decline in the amount of household vehicle traffic, with all states showing declines of 60% to 90% or more in terms of daily vehicle miles since the week of March 1.

With restrictions now relaxing in some states, vehicle traffic will surely increase, but we expect it to take time before daily miles return to normal levels.

Contrary to household vehicles, commercial vehicles are deemed an essential service and still on the move to deliver goods across the country. Aligned with Freight Transportation Research's Loadings and Tonnage forecast, we believe overall mileage for commercial vehicles will be down 7% to 10% for 2020. As for commercial vehicles in the energy sector, such as fuel tankers, unfortunately they would see a more severe impact.

Airline ground support is also down, as airlines reduce the frequency of flights.

Recovery for all these sectors will likely be a slow process, from months to years, depending on how the pandemic develops.

Q Just before the country shut down, you released a General-brand V.ply earthmover tire. How has that product been received?

A This product has been very well received, exceeding our expectations. Sales demand actually outstripped our supply, so we're working to get our stocking levels back in line with customer requirements.

Q How has the commercial tire market fared as part of an essential business? Is there promise for continued growth?

A Trucking is critical, especially in times of crisis, moving essential goods throughout the country. Those trucks still need tires, and Continental is ready with both new tire and retread stocks to supply their needs. We are not anticipating a dramatic impact on truck tire shipments from COVID-19.

On the commercial specialty side of things, we are lucky to be mostly operating in essential business environments. Road projects have picked up due to less traffic on the highways. Grocery store purchases of forklift tires have increased. We are hopeful that growth will continue in most segments as the world returns to normal.

Overall, we believe that our strong partnerships with our customers will lead Continental to success. In addition to our tires and retreads, many of our fleet customers rely on our digital tire monitoring solutions, which help them reduce costs and improve uptime. That becomes even more important during a crisis.

Customers also appreciate that we have our full team of reliable and technically trained representatives to help them. We have already transitioned to virtual meetings, helping our customers navigate the crisis and serving as an essential business partner.

Q Do you expect to roll out any additional products in 2020? What will they be and what sector will they serve?

A On the truck tire side, Continental is continuing to move forward with new product introductions. Earlier this year at the Technology & Maintenance Council annual meeting, Continental released the Conti HSR+ and Conti HDR+ regional 19.5-inch tires, delivering significant performance improvements in mileage and cut-and-chip performance, without sacrificing scrub resistance.

The company also introduced a new size of the HDL2 DL and HDL2 DL EcoPlus, the 295/75R22.5, which allows fleets to spec the same size tire on both the steer and drive axle, simplifying casing management.

We will continue to expand our Continental radial earthmover size range. Our agriculture radial line will expand into new and larger sizes. Several additional products are planned for release this year, with testing and development continuing despite any challenges from COVID-19.

On the General Tire side, one area to highlight is our light construction line, which will include skidsteer, backhoe and other small earthmover sizes for loaders, motor graders and general utility equipment at construction sites. We will also be introducing a General Tire brand non-marking forklift line.

Continental is also moving forward in the digital tire monitoring space. New solutions and increased functionality in existing products can be expected throughout the year. Customers looking for the lowest overall driving cost should strongly consider a digital TPMS, as properly inflated tires get 15% longer tread life on the tire's first life, and 20% longer casing life for retreading.

One customer has told us they have reduced roadside service calls to zero by implementing our ContiConnect Yard solution. This type of service around the tire helps our customers get the best bang for their buck.

Q Do you expect any major investments in the next six months?

A We are continuing with the ongoing ramp-up of our new plant in Clinton, Miss., which will allow us to produce even more tires here in North America.

Q What are some of the challenges of the industry going forward? What keeps you up at night?

A Fleets should continue to calculate lowest overall driving cost. Initial purchase price is not always an indicator of lifecycle value. If anything, COVID-19 and the resulting economic uncertainty reinforces the message that getting the full value from a tire is key.

Combining a premium new tire, quality retread, and digital tire monitoring technology ensures that a tire runs at its peak and delivers its full value.

The tire business is a mature business, and more companies join our industry each year. We continue to find ways to provide additional value and information to our customers through the highest quality tires, through digital solutions and through fleet analytics.

We must continue to be on the leading edge of this trend because the manufacturer that creates the best platform with the most ease of use will become the industry disruptor. Our ContiPressureCheck, ContiConnect Yard and ContiLogger Live are examples of our efforts in this direction.

Q Anything else you would like to add?

A Continental is committed to supporting the independent commercial tire dealer. With the size and resources of our corporation, we've been on the forefront with sharing information to help our dealers plot a course of action, including sharing information and analysis on national and state programs to support them. Our full sales team remains at the ready to support customers.

We are proud of how our dealers are responding to this situation. They remain ready, willing, and able to take care of customers, doing their part to help keep the transportation industry strong during a critical time. They know they can rely on Continental for support and information.

In closing, I would like to emphasize that Continental is here as a partner for our dealers and our fleet customers. We have tailored our production to meet market demand. We haven't stopped our new tire development projects.

We were ready for remote work before the crisis, enabling us to be flexible in adapting to the new normal from a work style, platform and technology standpoint.

We are following official guidelines and precautions, doing our part to keep our employees and customers safe. We are here to support dealers during and after this crisis. We are proud to be a part of this great industry that we believe will come out even better on the other side of the COVID-19 crisis.