Ludwig on: everything
When changes occur in an industry, two things happen. First, those who view the change as an opportunity usually come out stronger, and secondly, those who view change with apprehension and uncertainty usually come out as losers.”
Tire industry analyst Saul Ludwig wrote those words in January 1973, the first time he graced the pages of Modern Tire Dealer. Bias-ply and bias-belted passenger tires made up 87% of the replacement market. Fiberglass (!) was a tire material of great promise.
Those automotive aftermarket trends are gone. However, Ludwig’s partnership with MTD has endured — until now.
After almost 40 years with us, and 45 years as an analyst, Ludwig has decided to begin the almost inevitable transition to retirement. He has handed his duties covering the tire industry for Northcoast Research Holdings LLC to fellow analysts John Healy and Nick Mitchell, and will stay on to mentor them.
The “Ludwig Report,” which began as “The Marketplace by Saul Ludwig” in April 1975, will now be called the “Your marketplace.” Manned by Healy and Mitchell, the report will continue to help tire dealers keep track of, well, you know.
In this exclusive exit interview, Ludwig not only outlines the issues tire dealers will be facing in the near future and beyond, but also elaborates on them. His confidence in the independent tire dealer remains strong.
“Tires are a sophisticated purchase,” he says. “Selling tires requires a little hand-holding so that the consumer gets the right tire at the right price. There’s such a wide spectrum of brands and prices out there.”
We asked him, “What changes are now occurring in the industry that will affect tire dealers for years to come?” Read his answers — and, as he suggested 39 years ago, view them as possible opportunities to survive and thrive.
Legislation: There are a myriad of legislative activities that will influence the tire industry in the future: tire labeling; the whole concept of imports — and tariffs as a protective measure; the ongoing debate on the longevity of a tire.
This is the second time around with tire labeling, which I expect will replace the Uniform Tire Quality Grading system soon. How will future Congresses view the need for tariffs, especially after the 25% tariff on consumer tire imports from China expired? I don’t know. Whether it’s China or some other country, protectionism might still rear its head again.
Those are legislative issues that can be addressed or readdressed in the years ahead and will be. An analyst has to stay on top of them because they directly affect the profitability of tire manufacturers. They also could affect consumer preferences.
Consumer buying habits: Internet shopping has changed the way consumers buy things. If you want to buy a computer, you put in the model number, find out what the best price is and you buy it and have it delivered. And certainly there are a lot of Internet shopping comparisons on tires. However, the average consumer doesn’t understand the complexity of the tire, plus there are so many different brands. The consumer may start with Internet shopping and go into the tire dealership armed with knowledge of prices, but I think he’s still going to need some professional guidance.
There are several organizations selling tires over the Internet that have been pretty successful, like Tire Rack. Discount Tire also has a huge Internet tire sales organization. So does TBC.
One of the questions I wrestle with — and don’t have a hard-core answer for — is the trend toward larger and more complex tires at OE. I think today, only 40% or 50% replace their OE tire with the brand that came on that car. But the way new cars are being designed, with the tires being tuned to the suspension systems of those cars, there may be a greater propensity to replace the OE tire with the same brand.
Tire manufacturing trends: I think there’s going to be a trend toward building new plants where you expect to sell the tire versus building solely export plants. The increasing use of automation, and the resulting decrease in labor required, means there is less need to build in low-cost countries. For example, Bridgestone, Continental and Michelin are investing here in the United States, and they are not building these plants to export consumer tires. It’s the same with Sumitomo in Brazil and Goodyear in China. There will always be some plants that are built for exporting tires. Some of the smaller players are building plants to export into other countries in order to encroach on market share there, but more automation and a greater interest in building plants where those tires are going to be sold will be the trend.
Tire company philosophies: I wonder if there’s going to be more segmentation, with tire manufacturers becoming more niche-focused. Goodyear is reducing the number of SKUs to try to target specific markets — not all of them. The SKU proliferation is the greatest it’s ever been, and manufacturers can’t serve all masters. Pirelli’s a good example of a company that has a niche strategy and has been very successful. Michelin has somewhat of a niche strategy in that they only produce high-end tires.
Distribution from the manufacturer’s point of view: I think the trend toward using more wholesale distributors is going to continue because they are best suited to serve smaller dealers. There are always going to be small independent tire chains because we’ve got so many small cities around this country. They need to have tire dealers, and the tire dealers will need wholesale distributors to keep up with the proliferation of tires and sizes. That’s why you’ve seen wholesale distributors like ATD be very aggressive and acquire other distributors. I also think you’re going to see more consolidation at the distribution level.
Dealer Tire LLC: Dealer Tire is a fabulous success story. They’ve taken a business from nothing to over a billion dollars today. And when you think about it, they are doing that all domestically with just tires. Auto dealers have to find a way to make their repair departments more productive because not a lot goes wrong with cars today. I bought a new Toyota this year and for the first 25,000 miles, I get free service! So selling tires is one of the ways that is occurring, and Dealer Tire is teaching them how to sell tires. It’s a total concept of training, warehousing and delivery, and they are only dealing in OE tires.
They’ve got a lot of runway ahead of them in terms of growth potential. Their opportunity and challenge is to take their concept and make it work internationally, and possibly add other products to their distribution. While they are distributing tires, maybe they should distribute wiper blades or oil filters. Dealer Tire’s fantastic growth would suggest they’ve been successful in winning the hearts and minds of those new car dealers who buy tires from them, so the potential for selling them ancillary products is there.
China and/or other low-cost countries: When you talk about China and other low-cost countries, I guess the thing I worry about is the lure of China. Are there too many plants being built? Is demand being overestimated? There are about 1.2 billion consumer tires sold a year; if the market grows about 3% annually, you would need another 30 to 40 million tires a year to keep up with demand. That means five to 10 new tire factories a year, and there are now more than 50 tire plants, if you include truck tires, in various stages of production. I worry that maybe if they all are built and come on-line when the tire manufacturers said they would, we will have too much capacity. I’m not ready to make that call, but it is something that I monitor. Growth in China is the wild card. If the rate of growth in demand parallels the growth in supply, that would be fine. If the demand is not quite as good as the manufacturers building the tire plants expect, then there will be overcapacity. China’s still getting 6% to 8% GDP growth, which is pretty fantastic. ■
Ludwig on: consolidation
“With private branders, I think there’s going to be some sort of consolidation. And I don’t see any new private brand companies emerging.
“I also think that at the manufacturing level, we’re going to see some more global consolidation. There are probably over 75 tire manufacturers globally that are chasing a market that grows 2% to 3% a year, and I think that’s too many players for too little business.”
Ludwig on: OE business
“In the past, tire manufacturers typically lost money on original equipment business, but I think that has changed. I think their profitability on OE tires has improved greatly.
“Because of that, the same manufacturers who used to think about how they could limit their OE fitments now have a greater interest in getting wheel positions on cars, reversing what has been a little bit of a downward trend.
“Look at Goodyear’s recent financial results in North America. In the second quarter, the company’s replacement units were down 10%, while its OE units were up 12% — and Goodyear had all-time record earnings. It had to be much more profitable at OE for that to have happened.”