Analyzing the tire industry in 2009 and beyond

Tariffs were imposed. Labor negotiations were held. Raw material prices were volatile. Saul Ludwig watched as the drama unfolded. Looking back, he tells us what it all means for our industry

By: Bob Ulrich

“As we look to 2010, we see all the manufacturers starting to ramp up spending,” says Saul Ludwig. “There is a general feeling that consumer tire demand will increase.”

The drama brought about by the recession has yet to be played out, according to tire industry analyst Saul Ludwig.

“In a technical sense, yes, the recession is over — but not for the average American,” he says. “The 10% who are unemployed certainly wouldn’t think so.

"We’ve seen some inventory restocking that has yielded improved GDP (gross domestic product) numbers for the last two quarters, but real-end demand is still sluggish. Very simply, the recession took a toll on the tire industry.”

The lingering effects will not shake the guarded optimism he has for our industry in 2010, however.

“If gasoline prices hold in the $2.50 to $2.75 per gallon range, tire demand should improve modestly in 2010,” he says. “Manufacturers’ profits also should be improved from the low levels of 2009.”

Ludwig, a managing director with KeyBanc Capital Markets, has been writing a monthly column for Modern Tire Dealer since April 1975.

However, he began reviewing the tire industry for MTD’s annual “Facts Issue” in 1973.
Editor Bob Ulrich sat down with Ludwig to discuss the highs and lows of a very dramatic year, which encompassed not only a historic recession, but also the imposition of an additional 35% tariff on consumer tires imported from China.

MTD: Now that the dust has settled, what effect has the 35% tariff, which went into effect on Sept. 26, had on the industry, from tire manufacturers to consumers?

Ludwig: For manufacturers, there has been little impact. Prices were increased to cover the tariffs. However, some North American manufacturers are gaining share as imports to the U.S. are down dramatically.

It’s a totally different story for private brand marketers. The tariffs have made life more challenging for some, as their main source of supply and competitive edge was compromised. They now will have to look to Korea, Taiwan, Indonesia, maybe even Malaysia and Thailand for product.

The tariffs had little impact on most tire dealers. As a general rule, they almost always had some product available to make the sale because they carry eight or nine different brands. But certain sizes did become more difficult to get late in the year, causing some consumers to have to wait one or two days to get the tires they required.

When manufacturers raise prices, the pricing of tires in inventory, which were purchased at a lower price, also gets raised. So the tire dealers we talked with had a pretty decent year, even though they sold fewer tires.

For consumers, prices went up $3 to $5 per tire, but considering that a consumer buys new tires once every four years, having to pay up to $20 more for a set of four tires did not stop them from making a purchase. Additionally, the price gap between low- and medium-end tires narrowed.

Overall, the tariffs will have an effect on the number of consumer tires imported from China for the next three years. By the time the tariffs expire in September 2012, however, China’s own need for tires may keep imports to the U.S. from reaching pre-tariff levels. It may not have the capacity to ramp up imports again.

There will always be tires from China in the U.S. marketplace. There just might not be as many.