Commercial changes: Truck tire execs discuss raw material prices, truck pre-buy and freight slowdown
This has been a topsy-turvy year for the medium truck tire market.
Raw material prices are still going up. Replacement sales have been thrown off-kilter due to a massive pre-buy of trucks in 2006. And freight movement has been on a gradual decline.
In addition, the possibility -- however remote -- remains that recent government scrutiny of certain light truck tires built in China could lead to medium truck tires being placed under a more powerful regulatory microscope.
In this special Commercial Tire Dealer roundtable, executives from the domestic truck tire market share leaders discuss these and other challenges facing the U.S. commercial truck tire market.
Participants include Clif Armstrong, Continental Tire North America Inc.'s director of commercial marketing for North and South America; Kurt Danielson, Bridgestone Firestone North American Tire LLC's vice president of truck and bus marketing; Marc Laferriere, Michelin Americas Truck Tires' vice president of marketing; and Steve McClellan, Goodyear Tire & Rubber Co.'s vice president, commercial tire systems. Here's what they had to say.
CTD:What's the biggest challenge facing the commercial truck tire industry in 2007?
Armstrong: The dramatic rise in raw material prices that has taken place over the past 24 to 30 months has had the biggest impact to date, and looks to be continuing into the future. While the end user community has taken some of this increase, it has not come close to taking it all. The majority has been taken by the manufacturer.
Danielson: One of the biggest challenges facing the truck tire industry is the continuous escalation in the cost of raw materials for tire manufacturers. Since many tire components are commodity-driven, the market is very volatile and difficult to predict at times.
Laferriere: Catching up to raw material price increases. In each of the last two years at Michelin, we've seen double-digit increases in the price of raw materials as a weighted average. Such dramatic increases cannot simply be added to the retail cost of the final product.
McClellan: The commercial truck tire industry in North America, which has been soft during the first half, continues to be under pressure from a number of factors, including overall economic softness, rising fuel costs, lower OE truck tire demand and raw material costs that - while stabilizing - remain at high levels. We expect improved commercial tire demand in the second half. We expect truck manufacturers to step up production as customers look to buy new trucks.
CTD: What impact will the big truck pre-buy of 2006 (and consequent drop in truck tire shipments at the OE level) have on the replacement tire market?
Armstrong: The pre-buys do have a short-term volatility effect on the total truck tire market. The short term creates swings in availability and demand. Long term, we believe this is a positive. Many fleets are taking this opportunity to add to their number of trucks and those that are just replacing equipment are getting the latest equipment. All of this means that fleets will be much younger from an equipment standpoint.
Danielson: Because of the pre-buy, there were a number of idle trucks in the first half of 2007. These idle trucks had a negative impact on the first-half replacement market as they were slowly brought into service with new tires.
Laferriere: One of the biggest challenges we face in 2007 is to properly balance the manufacturing and import of products to stay in phase with demand. The 2006 pre-buy put a heavy burden on tire suppliers who have tried to maintain the correct level of service to end users who specified their brand on OEM trucks and to the dealer network that supported the same brand in the aftermarket.
McClellan: We expect the replacement market to improve as those new trucks require new tires, retreads and service. This will drive overall demand.
CTD: According to the American Trucking Associations, truck tonnage dropped month-after-month in April and May. June tonnage is expected to be down as well. Why? How much of an impact are high fuel prices having on freight movement?
Armstrong: The key to total tonnage being down is the general economic malaise led by slowing in the housing market. This segment helps drive overall tonnage. The high cost of fuel does have an impact as it forces carriers to be much better operators.
Danielson: In 2007, we have seen a slight downturn in construction, more specifically new home builds. This slowdown has had a negative effect on freight tonnage. And rising fuel prices most certainly will affect a fleet's profitability.
Laferriere: We know that truck tonnage is cyclical in nature. It tends to follow macro-economic indicators and also is influenced by some large industry fluctuations, such as the new house market. Fuel prices may be influencing a slight shift but nothing to be alarmed about. Trucks are and will continue to be a preferred mode of shipping.
McClellan: Freight movement correlates to broader economic indicators, which have shown some volatility. Housing, construction and manufacturing have shown weaknesses. Manufacturers and retailers also entered 2007 with strong inventory levels. As inventories are reduced, goods will be moved in greater numbers.
CTD: Will there be increased scrutiny of Chinese-made medium truck tires as the result of the recently announced recall of up to 250,000 Chinese-built light truck tires? Are current performance and testing standards for imported medium truck tires stringent enough?
Armstrong: Increased scrutiny would be a normal consumer reaction to this situation.
Danielson: The recent events surrounding the recalled tires from China will continue to raise many questions for end users. The issue is not where the tires are produced, but how they are produced and if the manufacturer will stand behind them.
Laferriere: DOT standards are already quite stringent. In addition, Federal Motor Vehicle Safety Standard 119 is already in the process of being re-written, just as FMVSS 109 was re-written for car tires.
McClellan: We've all seen a marked increase in dialogue around Chinese-made products in general. We suspect this will continue.
As it pertains to truck tire testing standards, Michelin's Laferriere believes that "the current balance of self-certification, auditing and early reporting works very well."
Intelligent truck tires?: Execs look ahead to 'the next big thing'
Truck tire technology is always evolving. We asked our panelists, "What's the next big thing?"
Armstrong (CTNA): Continental will introduce our Intelligent Tire System (ITS) in 2008. This new system will take tire pressure monitoring systems to the next level. ITS will give fleet managers a tool to better manage their tire wheel positions.
Danielson (BFNT): The singles biggest challenge facing all tire manufacturers will be reducing total running costs for fleets. This is achieved by managing the total tire life cycle from new tires to retreading.
McClellan (Goodyear): The next big thing in truck tire technology is true low-cost, non-proprietary intelligent tire technology that monitors a tire's operating conditions and assists in improved performance and lower overall operating costs.
Michelin North America Inc.'s Marc Laferriere says his company will continue to tout its Michelin Durable Technologies (see the December 2006 issue of MTD for more information.)