The Chinese tariff decision, six months later
They said a tariff on Chinese-made tires would disrupt the supply chain. They said a tariff would drive up prices and force their companies to seek products elsewhere. They said a tariff would place an unnecessary burden on low- and middle-income vehicle owners who can’t afford to buy high-end tires.
More than six months after the White House levied a 35% tariff on certain Chinese-manufactured passenger and light truck tires, all of the above predictions have come to pass, according to several private brand tire marketers.
“We’re still recovering,” says Jim Mayfield, president of Del-Nat Tire Corp.
Here’s a look at how private brand tire companies Hercules Tire & Rubber Co., SURE Tire Co. and Del-Nat have adjusted — and continue to adjust — to a post-tariff world. Looking forward, is the glass half full or half empty? Top executives from all three companies certainly have a lot to say about the situation.
‘An economic discussion’
Hercules CEO and President Bill Trimarco says the tariff decision was unnecessary.
“The Chinese didn’t break any rules. The U.S. government decided that the tariff should happen. This was no fault of the Chinese.”
The ironic twist, he says, is that when Hercules evaluates the risk of doing business with a supplier in a foreign country, “normally we focus on what that country might do to us. We don’t focus on what our own government will do to us!
“For most people, (the tariff) is not a political discussion; it’s an economic discussion. When you have the government picking winners and losers, there are going to be winners and losers. The tire industry has been hurt by this. The consumer has been hurt by this.”
In the run-up to the tariff decision, which was made in early September, Trimarco told government officials that imposing a punitive duty on Chinese imports would have several negative consequences.
“We said a couple of things would happen for sure: number one, prices would go up, and they went up.
“The second thing that would happen is there would be a significant disruption to the supply chain because the tariff changes the logic of where a company produces its tires if they have multi-country production. There have been supply disruptions.”
As an example, he reports that Hercules’ Tire Dealers’ Warehouse wholesale division is still having problems obtaining tires when and where they’re needed.
“The third argument, which is still unclear, is the impact on unemployment.”
The United Steelworkers union, which set the tariff process in motion by asking for a quota to be placed in Chinese tire imports, claimed that reducing the influx of Chinese-made tires into the U.S. market would restore lost American tire manufacturing jobs. They maintained that claim even after their requested quota morphed into a tariff.
“We believe very strongly that for the few jobs that were created or kept on the domestic manufacturers’ side here in the States,” job losses at tire dealerships and wholesalers that depend upon an abundance of competitively priced, Chinese-built product “will more than offset any benefits,” says Trimarco.
“But the Obama Administration seems far more concerned about protecting union jobs than protecting consumers, the small businessperson and the employees of the small businessperson.”
Hercules was forced to lay off eight workers at one of its warehouses due to extra costs directly attributable to the tariff.
“There were fewer tires coming in than going out of the facility and there was great pressure on margins.”
Hercules continues to source tires from China. “We have not cut back at all in terms of our commitments. We didn’t stop buying.”
Referring to the tariffs’ total run, Trimarco says “three years is a painful period. This tariff is a burden to companies like us. But it also goes away in two-and-a-half years, so we’re continuing to work with our suppliers.”
Hercules also continues to source a large number of tires from Cooper Tire & Rubber Co.
“We have a great relationship with Cooper, but the (tariff) decision also was hard on them. It disrupted their plans.”
However, when it comes to pricing, Hercules was forced to shift gears immediately after the tariff was put in place, says Trimarco.
The tariff announcement was made on Sept. 11. Hercules announced a large price increase, between 12% and 15%, three days later. More recently, the company made a second price adjustment.
“I think our customers were shocked by the first increase. But over time I believe most of them have come to appreciate how we’ve handled it in letting them know what we believe we need to do in order to survive and succeed.”
Hercules also has absorbed some extra cost and expects to follow suit next year, when the tariff drops to 30%. But don’t expect any price decreases, Trimarco adds.
Like other manufacturers, Chinese tiremakers are grappling with escalating raw material prices, which may send tire prices soaring again. But that outcome is impossible to control, he explains.
“For us to be successful, our customers have to be successful. We make our plans for the long term and we will continue our focus on having our products be what our customers need from a design and development perspective.”
Even though Hercules has pledged fidelity to its Chinese suppliers, “we will constantly evaluate our supply base.”
Before the tariff decision was made, Del-Nat’s Mayfield testified before the U.S. International Trade Commission (ITC) that “potential market disruptions would be caused” by the application of punitive duties.
That’s exactly what happened, he says. Due to uncertainty about the tariff’s impact on pricing and demand, Del-Nat stopped ordering tires from China after the decision was announced. The idea was to sell what was already in stock while seeking new suppliers from other countries.
Meanwhile, Del-Nat’s suppliers in China continued to build product, selling it in other parts of the world. “As the market adjusted, we discovered that there was no additional capacity of any significant volume in other countries to replace that,” says Mayfield.
The result? Near the end of 2009, Del-Nat began ordering from China again.
This time around, however, the Memphis, Tenn.-based company is feeling the squeeze. Del-Nat’s supply from China is down nearly 20%.
The company is selling its existing inventory. “But we need that flow (from China) to pick back up.”
It doesn’t help that shipping lanes have constricted due to the worldwide recession, Mayfield adds. “Some shipping companies have taken vessels out of service. There are fewer slots available.”
The 35% tariff also wreaked havoc on pricing. Shortly after it was enacted, Del-Nat’s cost for some Chinese tires spiked 15% to 18%.
Since then, due to raw material price increases, the same suppliers have hiked tire prices at least twice, Mayfield reports.
Del-Nat will continue to source product from its current partners in China. However, with fill rates still a problem, the company has been talking with potential suppliers in other parts of the world.
Finding modern factories with the proper controls in place to guarantee the production of high-quality tires is a key concern.
“A tire is not a tire is not a tire. We’re not going to take a chance by buying something that will not measure up to our standards.”
It can take months to establish a working relationship with a new offshore supplier, he notes — and that’s before a single tire rolls off the assembly line.
“In many cases, it takes months just to get started, and it takes a much longer period of time to get to where things are working smoothly and the production process is something we can depend on. Like we tried to explain to the ITC, it’s not a matter of just turning the power on at a closed plant and making tires.
“And manufacturers in other countries that we’ve talked to have said, ‘We’re not going to make decisions to invest the number of dollars it takes to expand our capacity based on a three-year tariff.’ By the time they would be ready to sell the tires, the tariff would be toward its end.”
In the meantime, Del-Nat’s members continue to ask for new products. “We’ve taken steps to bring on a couple of lines we have exclusivity on. They will supplement the supply to our stockholders.”
Del-Nat will start distributing Kumho Tire U.S.A. Inc.’s Marshal brand soon, “and we have other lines we’re bringing in, but not in huge volumes.”
Another impact of the tariff decision — one that is often overlooked, says Mayfield — was the message that it sent to Chinese tire manufacturers.
By producing tires for the U.S. market, they were simply responding to demand, he explains. “They didn’t have some strategy to dump tires into the U.S.”
Five or six years ago, China didn’t have the capacity to produce mass numbers of tires for export to the U.S., he says.
“But remember, this was the time when manufacturers in the U.S. were getting out of private brands and were canceling lines that we were buying.”
In response, Chinese tiremakers ramped up their capacity in order to build tires for Del-Nat and other suddenly displaced American private brand companies.
They simply seized an opportunity, says Mayfield. “They were very surprised by the tariff.”
[PAGEBREAK]SURE about the future
Pat McLaughlin, president of SURE Tire Co., is no fan of the tariff. He calls it “woefully unfair to those of us who have to source from outside the U.S.
“What the government has done by putting the tariff in place is target a segment of the market that has catered to consumers who don’t have the money to buy major brand tires.
“Ultimately, the consumer is the person at the end of the day who gets blasted.”
The tariff forced SURE Tire to raise prices. McLaughlin also admits that SURE Tire’s supply situation “has been challenged by the tariff on several fronts. The number of tires we import from China is down.”
Fortunately, SURE Tire had manufacturing deals in place with companies in other countries, such as Thailand, where Deestone Ltd. has been supplying it with products since 2008.
The company also had secured suppliers in Indonesia well before the tariff was enacted.
The problem, says McLaughlin, is that “once the tariff was put in place, some of our competitors decided that Thailand and Indonesia were wonderful places to do business, so they came in and created (additional) pressure at factories — not just ours, but others.”
SURE Tire will continue to import tires from Thailand and Indonesia and will maintain its relationship with its long-standing Chinese suppliers.
It also has broadened its scope in China by sourcing tires from new factories.
The company plans to expand several of its lines in the U.S.
“Our strategy hasn’t changed,” says McLaughlin. “We’re putting our emphasis on expanding our Summit line. We’re adding new sizes strategically,” including sizes for the ever-popular crossover vehicle segment.
That said, SURE Tire officials and the organization’s member-dealers are keeping a close eye on volume coming in from Asia. “Supply is going to become even more critical with replacement tire markets in Asia kicking in, especially China and India,” where domestic automobile sales are expected to explode within the next few years due to increasing consumer affluence and road improvements.
Like them or not, tariffs will be a fact of life for the next two-and-a-half years, says McLaughlin.
“Everyone has to deal with it. You can either throw your hands up in the air or you can look at it as something you have to live with, and revise your strategy based on what your needs are moving forward. The persons who are really being damaged by this are the consumers.” ■
Key piece’ -- TBC will continue to rely on China, says Olsen
TBC Corp. also has been affected by the Chinese tire tariff. Erik Olsen, CEO and president of TBC Wholesale, explains how in this interview:
MTD: What impact has the Chinese tariff situation had on TBC’s business, from both a supply and pricing perspective?
Olsen: TBC Wholesale has always implemented a global sourcing strategy. President Obama’s actions on Chinese imports necessitated that we rebalance our sourcing network. TBC is constantly upgrading its product screen, so some of the rebalancing was already scheduled and other projects were accelerated. Additionally, we initiated several projects with manufacturers outside of China that had originally been slated for development at Chinese-based manufacturing facilities.
MTD: Has the tariff forced TBC to source product from factories outside of China?
Olsen: China continues to be a key piece of our sourcing strategy. TBC has strong strategic partnerships with top quality manufacturers located in China, and we foresee a long, mutually beneficial relationship with them. We also are excited about initiating strategic partnerships with additional manufacturers both in and out of China.
MTD: Long-term, what is TBC’s strategy for dealing with the effects of the tariff?
Olsen: Due to TBC’s long-standing global sourcing strategy, there are really no long-term effects on our business.
Olsen says the percentage of TBC’s sales “accounted for by Chinese-manufactured tires is lower today than prior to” last September’s tariff decision.
However, Chinese tires “remain a very meaningful piece of TBC’s business.”