SRNA: Things are starting to look up

RANCHO CUCAMONGA, Calif. — While the U.S. economy is still in a COVID-19 slump, the retail tire industry appears to have started rebounding in May, according to Sumitomo Rubber North America Inc. (SRNA).

"We see changes that happen every day, but overall things are starting to look up. They looked pretty bleak about a month ago, but now we're seeing a lot of states start to open up, and in Canada, some (provinces) opening up. So there are some signs of life…" Rick Brennan, SRNA's vice president of strategic planning, said during the tire company's third COVID-19 Dealer Resource Forum, held online May 19.

As many states ease stay-at-home restrictions, people appear to be driving more.

Passenger vehicle miles traveled in the U.S. plummeted 48% in March as stay-at-home orders were enacted, according to research firm INRIX Inc.

By the last week of April, vehicle miles were down 35%, and for the first two weeks of May, they were down 29% compared with the pre-pandemic average, Mr. Brennan noted.

"We expect it to be around 80% of normal mileage by the end of May. That makes sense because states are opening up, people are starting to go back to work at offices, much like we are here. And they're starting to move around more," he said.

However, the trucking industry is struggling. Even though commercial vehicle miles traveled was down 11% for the first half of May, the amount of freight those trucks were transporting decreased.

"So although we see the mileage improving (compared with April), the amount of freight they're carrying isn't enough to sustain all of these freight companies. So we're starting to see layoffs."

Overall the industry saw a 22% decline in freight delivery in April, nearing 2009 levels. SRNA said it expects the industry to slowly rebound in May as auto makers resume production at manufacturing plants.

Referring to U.S. Tire Manufacturers Association (USTMA) data, Mr. Brennan noted that consumer tire sales appear to be improving. Passenger/LT tire unit shipments fell 45% in April, but were down 34% in the first half of May.

Truck/bus tire units, however, were down 15% in April and declined 19% in the first half of May.

SRNA said it expects passenger and light truck tire shipments to improve through the end of May while commercial truck tires are expected to remain the same through the month.

As for Sumitomo, "we're experiencing a drop but we're far outpacing the industry because of back-order fill. We've receiving more orders than we expected at the beginning of the month. So our market share has grown by nearly 1% since the end of 2019," Mr. Brennan said, noting the increase was across the board and in all channels of distribution.

In the first half of May, Sumitomo's passenger/LT sales were flat, and TBR sales increased 6% — but the tire maker experienced a drop in total volume, he said.

The rebound in the tire market can be attributed, in part, to federal stimulus checks sent to consumers and unemployment supplements to those furloughed or laid off during the pandemic.

"The stimulus really provides a lot more money to a lot of people out there," Mr. Brennan said.

In addition to having extra money in their wallets, many are not spending as much on such things as restaurants, bars and entertainment venues, which were shut down temporarily.

In most states, the federal unemployment supplement to state unemployment checks meant that many minimum wage workers were earning more off the clock.

Some tire dealers who had to cut staff in the last couple of months are now looking to rehire some or all of their released employees. But some dealers have said they are having trouble getting some workers to return because they are receiving unemployment benefits that exceed their wages, Matt Leeper, SRNA director of sales – consumer, said.

"Some dealers are still on some version of reduced hours as well. So we haven't seen a full return to standard retail hours for our retail dealers," he said.

"From an inventory standpoint, almost every dealer reduced purchasing when the pandemic first started — and by a huge range. Some as mild as 10%, some as high as 90%. As their April month-on-hand numbers increased quickly, many were citing cash flow concerns and obvious issues with inventory costs hampering their business," he said.

"What we've seen, in the last two weeks, is that fresh orders in most cases are higher than normal. Our larger dealers are increasing more than the smaller ones. We're seeing requests for distressed inventory and large order discounts are up," Mr. Leeper said.

"Many container orders came in rather healthy and in the end, at our winter (tire order) cut-off, we ended up selling five times more winter units via containers than we did last year," he said, noting that it may be attributed to the introduction of a new winter tire product. "But, still, a significant amount of winter container units were ordered."

In May, daily order rates have been increasing. "We are just seeing improved orders, improved dealer feedback and improved sales … and a really large increase in market share."

Regarding distributors: "We have seen very few resume their pre-COVID-19 delivery routes in frequency or reach. Some speculate that we may never return to the frequency levels we had prior to this pandemic," Mr. Leeper said.

He noted that wholesalers appear to be pushing modified associate dealer program enhancements or reduced unit level objectives.

SRNA increased bonus dollars to its Fanatic dealers rather than reduce the quantity of the objective to earn bonus levels, which he said, "seems to be very effective."

SRNA's Fanatic associate dealer program is expected to increase unit orders in the second quarter, compared with the first quarter, Mr. Leeper said, adding that the program signed up more than 200 new Fanatic dealers in the past few weeks.

The commercial tire business was negatively impacted by the downturn in the manufacturing and construction markets, according to Bob Klimm, director of sales - commercial.

Freight tonnage was reduced as plants, particularly in the automotive industry, which shut down temporarily in April and May — "That equates to a lot of material and product not being shipped in or out of plants."

Construction of buildings and infrastructure has been impacted to varied degrees, as state restrictions differed. So commercial tire dealers in some states are more impacted than those in other states with less restrictive stay-at-home orders, Mr. Klimm said.

"So the downturn in construction not only affects local building companies and their commercial tire needs, but it also affects trucking as supply and material shipping drops off."

On the other hand, regional and long-haul trucking, which appeared to bottom out in April, are starting to rebound in May, Mr. Klimm said, noting that local delivery has remained in a strong position due to a boon in online shopping deliveries.

"It appears the worst is behind us and that we're starting to climb out of the hole here in May," he said.

"The commercial business continues to suffer a slowdown that we saw in April at pretty similar levels. And while it varies from dealer to dealer — with wide swings from some dealers being down only 3% to 5% to other dealers being down 40% in their region because of certain restrictions and certain closures ... what we're seeing overall is that most dealers fall within the 15% to 30% reduction in volume range."

The auto OEMs are expected to take a hit this year after temporary plant shutdowns during the pandemic.

"The latest vehicle production forecast for 2020 is 12.3 million vehicles being produced. This is significantly down from the 16.6 million units that was forecast for 2020," David Colletti, vice president, OE/technology and QA, said.

Plant shutdowns due to stay-at-home orders in Michigan, Mexico and elsewhere, produced a ripple effect throughout the automotive industry where suppliers and OEMs rely on each other, he said. Resumption of normal plant operations has been impacted by sporadic supply issues, especially from Mexico.

Hence, the vehicle production forecast for the remainder of 2020 is less optimistic than it was in March, amid more production delays and slower ramp up of plant operations than were expected two months ago, he said.