In part two of this MTD exclusive, analyst John Healy discusses tailwinds and headwinds facing the U.S. tire industry, plus tariffs, manufacturing investments and more.
MTD: The U.S. International Trade Commission is looking at applying tariffs to TBR tires made in Thailand, which happens to be the biggest exporter of TBR tires to the U.S. How will the Thailand TBR tariff investigation play out and if tariffs are applied, how will this impact the industry?
Healy: The main question the investigation is seeking to answer is if lower-tier Thai tires compete with higher-tier American-produced tires. If the commission determines that Thai tires do compete against American tires, they are more likely to implement and enforce a tariff on Thai tire imports. If the tariff is enforced, we will likely see tire production in (Thailand) slow as we did with the implementation of tariffs on Chinese imports. Ultimately if the tariff is implemented, we are likely to see another Asia-Pacific country begin producing and exporting lower-tier tires to the United States in the future. Additionally, we feel that tariffs are somewhat of a tough item to justify in some ways in the current environment. While TBR units are unique, we think that the Biden Administration is looking for ways to combat inflation and bring down costs. Having trade commissions/regulators push tariffs at this time might be more counterproductive to broader, near-term goals. It will be interesting to see how this develops.
MTD: We’ve heard that tire companies are already moving molds out of Thailand in anticipation of new tariffs. What are you hearing? Is the option of bouncing from one manufacturing country or region to another limitless?
Healy: We believe that if the tariffs are passed, we are likely to see production shift to other low-cost, low-tariff countries. While it sounds like an easy solution, we believe that shifting production capacity is no easy task and requires extensive capital investments and projects to get production off the ground. We are likely to experience further investments into North America as manufacturers seek to avoid costly location changes in the future.
MTD: A number of tire manufacturers announced significant investments in North American-based plants during 2023. Which investment, in your opinion, will be the most significant? Are tiremakers’ planned investments reflective of their optimism about future demand? If yes or no, why?
Healy: We believe that planned investments in North America are reflective of many factors. We feel that updated and broader capacity additions in North America are justified since yesterday’s capacity cannot produce tomorrow’s tires. We strongly feel that unit demand will pick up in the years ahead, as replacement activity is accelerated by the deployment of electric vehicles. We feel that in some ways, this could be a gold rush opportunity for tire manufacturers, with the replacement cycle perhaps being cut in half for some models of comparable vehicles. Beyond this, we see global demand as a driving force to more North American production. A result of globalization is that emerging markets grow and become consumption markets. We feel that is happening in Asia, Latin America and Europe. Said another way, tires produced in those regions that come to North America at some point in time are going to be retained in-market to meet the needs of the growing economics in the region.
MTD: How did the United Auto Workers (UAW) strikes affect tire manufacturers’ supply during the fourth quarter of 2023?
Healy: We believe that the UAW strike had little impact on tire manufacturer supply due to the length — or lack thereof — of the strike. We think if the strike was prolonged, we could’ve seen a much more pronounced impact on tire manufacturers as new vehicle production was more adversely impacted.
MTD: During the strike, were tiremakers with non-union plants able to pick up share and if yes, how significantly?
Healy: We have not seen any evidence to support that view.
MTD: How will the settlement between the UAW and the impacted car manufacturers affect the tiremakers that have union plants? How will a settlement impact tiremakers that have non-union plants?
Healy: Following the settlement of the UAW strike, we saw auto manufacturers resume full production. Unionized tire plants may see the success of the strike as a signal to fight for higher wages and benefits during renewal years, potentially driving up manufacturer costs. As for non-union plants, we could see a push for higher benefits from workers potentially under the threat of unionization after witnessing the success achieved by UAW.
MTD: What impact, if any, will the ongoing war in Ukraine and the newer war in Israel have on the U.S. tire market?
Healy: The impact we are likely to see is that of increased raw material prices and constrained supply as supply chains and manufacturing plants are impacted. If the wars escalate even further in new ways, there could be a much more material impact on raw prices — further straining manufacturers, distributors and consumers. Should the Israeli/Palestinian conflict escalate, we could see risks to manufacturing plants in the Middle East.
MTD: What are the five biggest headwinds for 2024, for both tire manufacturers and the distribution channel?
Healy: The five biggest headwinds for 2024 are the potential continuation of the consumer deferment cycle; macroeconomic pressures forcing consumer trade-down; the lack of tariffs on Thai imports, causing an influx of low-tier tires; escalation of global conflicts, causing supply chain failures, while elevating prices and furthering an affordability crisis; and the risk that a ‘green winter’ could slow down seasonal tire purchases.
MTD: What are the five biggest tailwinds for 2024, for both manufacturers and the distribution channel?
Healy: The five biggest tailwinds we see to the tire industry in 2024 are the continued decline of raw material prices; the end of the consumer deferment cycle; further adoption of EV and EV-specific tires; alleviation of macro-economic pressures, including but not limited to inflation and interest rates; and continued strength in travel trends increasing total miles driven.
Click here to read part one of this interview.
