Saul Ludwig lays his reputation on the line throughout the year -- that's the nature of his job. As one of the pre-eminent, if not the top, tire and chemical industry analysts in the country, he predicted a decline in five of the six major tire segments last year. As it turns out, all six declined. "It was not a good year for tire shipments," he says. "On the replacement side, you had modestly lower retail sales. But inventory reductions by dealers exacerbated the problem. Dealers said, 'I think maybe we'll just buy what we need, because hopefully there will be a deal later on.'"
There also were "a lot of tires shipped to Ford because of its recall, so there was a shortness of supply in certain sizes."
No one, however, could have predicted the Sept. 11 terrorist attacks. And the reverberations are still being felt among domestic analysts, according to Ludwig. "The full ramifications of Sept. 11 are not yet known, which makes us a little less confident in our estimates." However, once again, in Modern Tire Dealer's annual interview with him, Ludwig puts himself on the line.
MTD: Saul, please take us through U.S. tire shipment highlights in 2001, and your forecast of shipments in 2002, starting with passenger tires.
Ludwig: It looks like original equipment passenger tire shipments will be down 10% for the year, to 54 million units. A year ago, I predicted they would be down 8%. In 2002, I project an additional 5% decline to 51.3 million units.
In the replacement segment, passenger tires will be down 3%, to 192 million units, compared to last year. At the beginning of 2001, I predicted they would be down 1%, but we didn't know about Sept. 11 at that time. For 2002, shipments will decline another 1% to 190 million units.
MTD: How will light truck tire shipments fare?
Ludwig: This year, OE light truck tire shipments fell 16% to 6.1 million units. I predicted a 10% drop at the beginning of the year. For next year, I'm predicting a 5% decline to 5.8 million units.
On the replacement light truck side, tire shipments fell 9% to 31.3 million units. I predicted a 3% increase at the beginning of the year. For 2002, I'm predicting a 2% increase to 32 million units.
MTD: What are your shipment estimates for the OE and replacement medium truck tire markets?
Ludwig: OE medium truck tire volume fell 35% to 3.6 million in 2001 -- I predicted a 15% drop. For 2002, I see no change. The market will remain flat at 3.6 million.
Replacement medium truck tire shipments dropped 9% to 13.5 million units. I predicted a 14% drop. For next year, I see a 3% increase to 14 million units.
MTD: Will we see incidents of tire manufacturers buying all or part of independent tire dealerships -- Morgan Tire & Auto Inc. selling to Bridgestone/Firestone Inc. comes to mind -- increasing in number?
Ludwig: I think this was a special case that was in the works for many years.
Bridgestone/Firestone and Morgan were joined at the hip. A similar thing happened a few years ago with Michelin and TCI. But I think that union was more out of necessity than design.
I don't think we're going to see overt moves on the manufacturers' part to build retail positions. Maybe some will be defensive in nature. It's not their bag -- they're better at selling through independent tire dealers, mass merchandisers and wholesale distributors, which are better able to reach the ultimate consumer.
MTD: Our statistics, and those of other industry researchers like J.D. Power & Associates, show the majority of tires are sold, not bought. But sometimes it seems like the manufacturers are emphasizing the end user over the dealer. Are they taking independent tire dealers for granted?
Ludwig: I would say they're not taking them for granted. If anything, it's just the opposite. I think their strategy is to make it easier for a dealer to sell a particular brand.
Michelin, I think, does the best job in creating consumer awareness about its brand. The company is not trying to circumvent the dealers by doing so, in my judgment. It just wants the consumer to think about Michelin brand tires.
Cooper has done the same thing with Arnold Palmer, and Goodyear with the blimp. But Goodyear hasn't done as well with its consumer focus as it could have. That's why it brought in firepower, with Bob Keegan, Cathryn Fischer and a new ad agency.
If Goodyear succeeds in creating greater brand awareness, it will be good for the dealers. So I don't think the manufacturers are taking them for granted, and I think dealers are making a mistake if they think that.
MTD: Tire manufacturers seem to be suffering this year primarily because of a downturn in the commercial segment. The retail side seems to be holding its own. Please comment on this, and, if you agree, why are tire manufacturers making strategic changes in the retail end and not the commercial end?
Ludwig: I agree. I think the downturn in the commercial segment is a major factor why they didn't do well. I think retail held up well, with maybe a modest decline.
There was substantial fallout in medium truck tire shipments at OE; as I said earlier, there was a decrease of 35% over last year. This caused companies to reduce production. So they were producing less, selling less, and reworking their inventories, all of which combined to hurt profitability. That's why every tire manufacturer will have lower profits than last year.
Bridgestone/Firestone is trying to re-direct its efforts toward the Bridgestone brand over the Firestone brand. Because Goodyear company-owned stores have lower tire sales per day than other chains, they are experimenting with formats like Just Tires in order to utilize physical assets more effectively. But these are tactical changes, not strategic changes.
MTD: Let's take an analytical look at some of the tire industry's most persistent rumors and theories. First, what have you heard about the possible sale of South Korea-based Kumho Tire?
Ludwig: There have been news items about it, but they mostly have the company being purchased by financial buyers. I wonder why financial buyers would want to stick their toe in such a competitive global industry. I would place low odds on a financial buyer buying Kumho.
MTD: Do you think the Firestone brand will survive? What are your thoughts on the immediate future of Bridgestone/Firestone Inc.?
Ludwig: I think for the next several years the Firestone brand will survive. After that, it depends on a variety of circumstances.
Bridgestone/Firestone's management is playing the brand the best they could given the mess they were dealt. The supposed "olive branch" to Ford is a step in the right direction.
Bridgestone/Firestone has the best dealer network in the country. If it can reconcile with Ford, continue to promote the brand through IndyCar racing, resume corporate profitability and avoid bad press, the Firestone brand can survive. If all four of these things don't happen, the brand's longevity may be in jeopardy.
As for Bridgestone/Firestone's immediate future, the company is working hard to resolve remaining lawsuits that still linger, and has dramatically shifted consumer focus to Bridgestone. And don't forget about Dayton. I think most of the demise of the Firestone brand has occurred. Its rate of decline is decelerating. I would say Watanabe and Lampe (Bridgestone Corp's CEO Shigeo Watanabe and Bridgestone/Firestone Americas Holding Inc.'s Chairman, CEO and President John Lampe) are doing all the right things.
MTD: Is Continental AG or Continental Tire North America close to a merger or sale? They have been in talks with other tire companies -- Cooper, for example -- and appear to be suffering financially. And speaking of Cooper, is it thinking of selling off part or all of its tire division?
Ludwig: I don't believe Continental AG or its North American subsidiary is close to a sale. But the companies are not doing well. There have been lots of management changes at both. If things don't improve, a merger could occur sooner rather than later.
All this aside, I have long believed Continental would merge with someone else because they don't have global reach to be competitive longer term.
As for Cooper, no, I don't think they're thinking of selling off its tire divisions. I don't think Oliver fits into its long-term plans, but the retreading segment is a small part of its overall tire division. Commercial tires are a small part as well -- I don't think it's a high priority for the company. But it fills a niche for some of its dealers. And Cooper did better in this segment than some of its competitors.
MTD: Last year, you said small and medium-sized dealers have a difficult future in major markets. Has your opinion changed any?
Ludwig: No, my opinion hasn't changed. More small dealers sold out in 2001, and that will continue in 2002.
MTD: Who were the market share winners and losers in the U.S. in 2001?
Ludwig: I think Goodyear and Michelin were market share winners, and everyone else was a loser. Goodyear and Michelin were the main beneficiaries of the recall of Firestone tires.
Commercially, Michelin may have lost some share because its pricing wasn't competitive in the first four months of the year. During that time, its medium truck tire sales greatly under-performed compared to market. But it has since adjusted and made up some of what it lost.
MTD: Sears seems to be promoting major brands at the expense of private brands. Michelin has said major brands are growing at the expense of private brands because the consumer is more brand conscious now, in part because of the Firestone recall. How would you compare the major and private brand tire segments?
Ludwig: Major brands are increasing and minor brands are decreasing. Because consumers are more conscious of their tires and more concerned about safety, it's very easy for a tire dealer to say, "For an extra $10, you can have a Goodyear, Michelin or General."
This is part of the reason why Goodyear is focusing on the end user. It wants to fortify its own brands at the expense of competitive brands, which is what Michelin has always done. So some private brand companies are hurting.
MTD: What is your take on the truck tire retreading industry from the tire manufacturers' viewpoint?
Ludwig: I would say by not resolving their legal disputes, Michelin and Bandag have suffered. But it's clear to me Michelin and Goodyear are putting more emphasis on retreading -- they want to capture that additional sale they were giving to Bandag and Oliver. They are putting more resources behind it. Bridgestone/Firestone is apparently satisfied with its arrangements with Bandag and Oliver, and I see that continuing.
MTD: With integration slow -- it's been two years -- is the alliance between Cooper Tire and Pirelli Tire North America reaching a breaking point?
Ludwig: The two cultures have not yet jelled, but they are still working on it. It would be hard for Pirelli to end the relationship because it doesn't have a sales force or manufacturing plant in the U.S. anymore.
MTD: Did tire company earnings meet expectations in 2001?
Ludwig: No, they fell substantially since the beginning of the year. In year 2000, the problems were pricing and raw material costs. This year, prices relative to raw material costs are at a satisfactory level.
Volume was the problem. It was worse than expected. If you count units sold for all types of tires, volume was down 6.5% this year. That's awfully high given that these companies have plants that need to operate at a high operating rate.
Demand was down 6.5%, while production fell 9-10%. When manufacturing plants experience lower operating rates, manufacturers get hurt. So it was a production issue.
MTD: What factors will affect tire company performance in 2002?
Ludwig: There are a number of factors, and one is volume. I'm looking at a 1% drop in sales in 2002, so we're not going to get any help in volume.
However, reducing costs will improve profitability. Closing plants reduces fixed costs, while layoffs reduce variable costs. Some companies will experience lower legal costs in 2002 than they did in 2001.
And we won't have a need to reduce inventories. Tire manufacturers are going to produce what they sell. So tire production will go up in 2002 even though I see a 1% decline in sales.
There also have been significant management changes at every one of the major tire companies this year. Michelin revamped its sales department in the U.S. Continental named a new passenger and light truck division head. Goodyear restructured its sales and marketing departments, which dramatically changes the way it will go to market. Bridgestone/Firestone reorganized is corporate structure. Hopefully, these management changes will bring about some improvement.
MTD: Thanks, Saul.
