The Importance of Tier 2 vs. Tier 3: Why Building a Consumer Tire Plant in the U.S. Is Challenging for Overseas Manufacturers
At the beginning of 2018, at least two of three foreign tire manufacturers were expected to break ground on consumer tire plants in the U.S.: Wanli Tire Corp. Ltd. and Triangle Tyre Co. Ltd. No timetable has been announced for the third, Sentury Tire North America LLC, to begin construction.
To date, none of them have distributed the ceremonial shovels, with Wanli putting its plant plans on hold. At the same time, existing domestic plants continue to increase capacity as need be.
According to research by Tire Consultants Group LLC, new plants being built in the U.S. by foreign companies need to produce close to 6 million tires a year after the first phase of construction is completed. Tire pricing also needs to be closely scrutinized.
“Most interestingly, we found that the number they should reach is 6 million units annually,” said Skip Viola, president of Tire Consultants. “They may have different thoughts on how to ramp up and reach that, but that seems to be the production level they need to reach.”
Viola has more than 40 years of experience with tire distribution, most notably with Treadways Corp. He co-founded Tire Consultants with Richard Clarke in 2012.
“When we first started doing these analyses, we realized we had to get a financial expert to help us develop and study pro forma financial statements. We found that if the transplanted company sold all 6 million units at third tier tire pricing — whether or not you believe there is a fourth tier — it couldn’t make money.
Foreign companies need to produce close
to 6 million tires a year after the first phase
of construction is completed, says Viola.
“No matter how we spun it, they wouldn’t make money. So we then took a step back and found out that 50% of the units coming out of the factory needed to be sold at Tier 2 pricing. If you’re new in the U.S., you’ve got a limited period of time to have a brand or brands recognized as Tier 2 value. The math was shocking to me.”
Four more transplants
Nokian Tyres plc, which broke ground on its passenger and light truck tire plant in 2017, is on schedule to begin producing tires at its new U.S. plant in 2020. Three other foreign tire companies, Giti Tire (USA) Ltd., Hankook Tire America Corp. and Kumho Tire Co. Inc., have opened plants in the last three years. Plant capacity at both the Hankook and Kumho plants is well over 6 million tires a year.
Viola said he couldn’t comment on the details, but said it is possible to create a Tier 2 brand within five years. When asked to give a few examples of a Tier 2 brand, he mentioned Sumitomo and Hankook.
“The original data we used was hypothetical. First we developed what the U.S. market would look like over the next five years, from the standpoint of size, demand and business environment. Then we started doing the financial research at the 6 million unit level.
“We looked at a very diverse customer base for these proposed 6 million new tires. We had regional wholesalers, regional retailers and independents — one or two of which you might call chain-type customers that a tire manufacturer might make a proprietary brand or two for. We didn’t look at the auto dealers at all. We just looked at as diverse a customer base as you could build if you’re building a few brands.”
All the conclusions led to the need for a Tier 2 brand, said Viola.
“We used a very high-tech manufacturer’s costs. If you’re building Tier 3 tires, you could sell them for lesser money. In our business model, we were building a product that would stand up to Tier 2, regardless of where it was positioned.
“We took a realistic approach to building a tire plant in the U.S. We think there are challenges for any foreign tire company building a plant here.”
Would importing tires in addition to building 6 million in the U.S. change the business model enough to be profitable? Viola said no.
“There are economic outcomes that may affect our research. For example, maybe the manufacturer gets better prices on raw materials than we projected. Maybe the company develops a relationship with a couple-million-unit retail customer and can provide him with logistical support.
“In the practical and real world, could the challenge be overcome? Maybe. But our hypothetical world says it would be very difficult.” ■
By the numbers: U.S. tire plant capacity
No. of plants: 46
No. of non-union plants: 28 (61%)
No. of manufacturers: 16
Total daily capacity: 737,000 tires
Consumer tire percentage of capacity: 82%
State with most daily capacity: South Carolina (115,580)
Source: 2018 Modern Tire Dealer Facts Issue