US tyre makers hit hard by declining demand

By Bruce Meyer, Crain News Service

Akron -- There's a storm brewing in the US tyre industry, and the result is a cutback in the nation's tyre production by most of the major manufacturers.

The tempest is the dual decline of both original equipment (OE) and aftermarket tyre sales, an uncommon occurrence in the industry. Typically, when OE volume is down, the replacement market picks up, and vice versa.

Not this time. The Rubber Manufacturers Association's (RMA) Tire Market Analysis Committee expects declines for 2008 in both OE and aftermarket shipments across passenger, light truck and truck/bus tyre sectors, with little hope for much improvement in 2009. Shipments are forecast to drop 13 million units in 2008.

That has caused most of the nation's tyre makers to “align production with demand.” In other words, they're not making as many tyres.

Those cutbacks have taken various forms, including everything from simple adjustments in the daily production ticket, to prolonged shutdowns for certain lines, to a capacity study by Cooper Tire & Rubber Co. that probably will result in its closure one of its US tyre factories.

“You don't want to build inventory, which will consume cash,” said Saul Ludwig, an analyst with KeyBanc Capital Markets Inc. “There's no reason to produce tyres that aren't being sold.”

Ludwig said it's clear there is currently too much capacity in the tyre industry, both in the US and globally. New facilities in Mexico, South America, Eastern Europe and Asia came on stream the past couple of years at a time when demand has weakened.

A recent study of global tyre capacity indicated that capability rose almost 6 percent this year and is projected to grow 2.6 percent in 2009 and 2 percent in 2010, he wrote in an Oct. 28 report on Goodyear. “With the rapid deterioration in the global economic outlook, including new car and truck production, it is clear capacity is growing far more rapidly than demand,” he wrote.

Ludwig said market conditions-including dropping raw material prices-may put downward pressure on tyre pricing.

“If raw materials are coming down and demand is coming down, and there's too much capacity, that's not an environment where one can be firm with their pricing,” he said. The Cleveland-based analyst noted, however, that he has not yet seen evidence that any tyre firms have “cracked” in their pricing.

Company initiatives

While each of the Big 3 tyre makers-Bridgestone/Firestone, Michelin North America Inc. and Goodyear-have taken steps to cut tyre output in the US, so far only Cooper has publicly given any indication that a full plant closure is an option.

Cooper began a 90-day capacity study of its US tyre plants after which the company said it is likely one of the factories will close. “It's going to help us fulfill our strategic plan to improve our cost structure and allow us to be more competitive in the US market,” said Pat Brown, vice president of global branding and communications.

Cooper makes about 75 percent of its tyres in the US-that's higher than other competitors in the market-but it has made moves recently to boost production in low-cost locations such as Mexico and China. “We just know that we're unique among the major manufacturers, having that much of our production in the US,” Ms. Brown said. “For competitive reasons, we need to broaden that footprint.”

For its part, Michelin said the downturn in OE and replacement tyre sales caused it to curb its passenger and light truck tyre production, effective Nov. 1, for up to eight weeks at its BFGoodrich tyre plants in Opelika and Tuscaloosa, Ala., and Fort Wayne, Ind. The cutbacks will bring temporary layoffs to about 40 percent of the work force-or 1,500 employees-at those factories.

“The purpose of this approach is to continue to provide a high level of service to our customers to ensure they have continued access to the products that remain in strong demand,” said Scott Clark, chief operating officer of Michelin Americas Small Tires.

He said the plants that make Michelin-brand tyres haven't been impacted to this degree because the actions to align production with demand differ significantly by factory based on the brands, products and sizes made there.

“The methods we use to curtail production are different based on the level and duration of required production reductions,” Clark said. “In general, the fact that the Michelin brand and our total passenger car business in North America has gained market share in 2008 has likely resulted in Michelin feeling less of an impact of the market downturn than our competitors.”

And while Michelin doesn't have plans to shutter any of its existing tyre facilities, the firm's projection of a downturn in the North American market prompted its decision in August to scrap plans to build a tyre factory in Mexico, he said.

Bridgestone Firestone North American Tire LLC has taken steps to keep its North American tyre production where it needs to be, a company spokesman said. The firm extended shutdown dates at some factories, reduced daily production and curbed or eliminated overtime.

“It's not a one-size-fits-all proposition,” he said. “There are not a lot of alternatives aside from reducing your production so you're not producing tyres that are going to sit.”

Bridgestone expects to keep the reduced production levels in place through the end of the year, though the tyre maker said it will continually evaluate the marketplace and make further adjustments as necessary.

Goodyear said all of its domestic tyre plants have been impacted in one way or another. After having a variety of shutdowns the last two months, the firm idled three of its consumer tyre plants the last week of October, a company spokeswoman said. In addition, a fourth plant will not operate for four consecutive Sundays.

On the truck tyre side, two other Goodyear plants temporarily will idle production two weeks each the remainder of the year.

Even the bustling Toyo Tire North America Manufacturing Inc. plant in White, Georgia, has been impacted by the economic downturn, as well as the hurricane season. It first had to curtail several days of production in late October because of a shortage of butadiene rubber and SBR in the aftermath of Hurricane Ike, according to James Hawk, president and plant manager of Toyo's US manufacturing operation.

Other than that, Toyo has tapered back on daily production volume but has had no layoffs. “We will analyse October sales, inventory and customer forecasts before we make any further decisions,” Hawk said. “Unless there is some jump in consumer spending, it is foreseen that we may need to schedule some days out of production to adjust for inventory.”

Toyo Tire (USA.) Corp. also is delaying the completion of an expansion that was to double the White plant's capacity by the end of 2010.

“We will now install the equipment over a longer term with the same start-up date but extend the completion date by six to 12 months,” he said. “We do not plan to stop construction unless current economics get much worse.”

Some positive trends

Not everything in the tyre industry is negative, however. The farm and off-the-road (OTR) tyre markets are strong, and Goodyear said its aircraft tyre production remains at full levels.

“We're rolling right along,” said Maurice Taylor Jr., Titan International Inc. chairman and CEO. “Production is going to be full bore.”

Titan on Oct. 29 announced record sales and earnings for its third quarter, and Taylor said the firm is keeping its eye out for possible acquisition opportunities.

Bridgestone isn't reducing production at its Bloomington, Illinois, or Des Moines, Iowa, factories, where it makes its OTR and farm tyres, respectively. “Our challenge in the OTR business is we can't make them fast enough,” a spokesman said.

In addition, Pirelli Tire North America Inc. just announced plans to add a production line at its lone US tyre plant in Rome, Georgia, and Continental Tire North America Inc. is going ahead with planned expansions at its Mount Vernon, Illinois, facility.

Besides recent drops in some raw material costs, the drop in gasoline prices may increase driving levels and give a boost to the tyre market. Analyst Ludwig, however, said while the gas price drop means extra money for consumers, there are other negative factors in play-such as mass layoffs-that counterbalance the positive forces.

Tire Business Web coordinator Lisa Hockensmith contributed to this report.

From Tire Business (A Crain publication)