What We Learned About the Tire Industry at the 2017 SEMA Show
“The sentiment on the showroom floor was the most pessimistic we have seen since 2012.” Analyst and Modern Tire Dealer Columnist Nick Mitchell said the mood matched this year’s poor sell-out trends in the domestic passenger and light truck tire market.
Mitchell, managing director and research analyst for Northcoast Research Holdings LLC, said his conversations with key figures in the global tire industry indicated a clear consensus of the poor sell-out trends. But there wasn’t a clear answer to the question of “why.”
“We find it hard to believe that there has been a fundamental change in the intermediate-term drivers of demand — a view that was universally shared among the attendees that we spoke with.”
There’s agreement that the key drivers of demand for PLT replacement tires remain in place: the size of the car parc, vehicle miles driven, and the health of consumers. Still, Mitchell said most have a “guarded outlook on sell-out trends in 2018.” The consensus was an increase of 1%, which is the weakest summary forecast since 2012.
Mitchell summarized the 2017 Specialty Equipment Market Association (SEMA) Show with four key takeaways:
A Year to Forget
This year will be known as a year to forget — for unknown reasons. Mitchell’s contacts said demand at retail was “at best” flat through the first 10 months of 2017. Among the reasons offered for that poor performance is the belief that low-to-middle income households aren’t participating in the recovering economy. Others thought falling vehicle prices had prompted weaker demand from used car dealers. Some blamed the lack of interest in driving and car ownership among young people for some of the decline. And of course, the unseasonably warm winter earlier in the year in the Midwest, Northeast and Upper Mid-Atlantic played a role, too.
“Nearly every retailer, wholesaler, and manufacturer representative that we spoke with had a guarded outlook on sell-out trends in 2018.” Because those contacts couldn’t explain the shortfall of 2017, they believe it’s “prudent to plant conservatively” for the year ahead.
“It is worth noting that this was the most muted consensus forecast that we have put together based on our conversations since the 2012 SEMA Show. In fact, this was the first time that we did not hear a single individual forecast a growth rate of 2.0% or higher.”
A Competitive Backdrop
The start of the fourth quarter came with “a handful” of downward price adjustments and more aggressive promos, mostly in the bottom half of the Tier 2 and Tier 3 segments, including brands owned by the Tier 1 tire makers. Others reported more marketing incentives from Tier 1 players in the final months of the year.
“Another prevalent theme on the show floor was that many wholesalers, and to a lesser extent, dealers, indicated that they are temporarily narrowing the number of suppliers they are placing orders with through year end in an effort to ensure they hit their full-year volume targets that still remain in reach.
"This behavior will create the biggest challenges for Goodyear and Cooper Tire, as they have been two of the weakest performers this year (as measured by sell-in trends), partially due to the timing of their price increases relative to the rest of the industry.”
The Rush of New Tire Production
Given the recent soft demand, Mitchell said there was lots of talk about the pipeline of new tire capacity in the U.S. and Mexico.
“While there was sporadic commentary about aggressive pricing from some of the players that are ramping up production at new facilities in the U.S. (especially Kumho and Hankook), most of the individuals that we talked to think the 70 million units of capacity that is expected to come on-line across the Americas region between 2016 and 2021 will have little impact on pricing.
“While there will definitely be imbalances between increases in supply and demand in certain regions, expectations continue to be that the supply/demand equation will remain fairly balanced at the global level.”
Mitchell said he too is watching the ongoing developments in capacity. “Our base-case view is that much of the new capacity that is earmarked for North America will replace units that are currently imported to the U.S., with the existing capacity in Asia redirected to emerging markets in the region.”