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What the Future Holds

An incomplete economic recovery continues to hamper the industry, but potential China tire tariffs pose a greater threat to the tire market future

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“Economic well-being requires a certain level of optimism, a firm belief that success is possible, even when times are hard. Markets crash. Businesses fail. But if people today are unwilling to take measured chances, we haven’t recovered at all. That may affect career and investment decisions for decades.”
– BusinessWeek

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So after all that you have read in this special issue, what do we see going forward?

While certainly, as our panel of experts indicates, the picture is rosier, there are still pockets of concern. – and still disagreements as to what the tea leaves really mean.

Chief among the worries today are the fate of imported tires produced in China and “The Recovery.” There are many layers to these concerns, and some of the background issues run excep­tionally deep.

But whether you’re talking about employment, age demographics, retailer health, the stock markets, retailer health, market fairness, labor and manufacturing, costing and pricing and many other concerns, in our view, one can trace back to these two situations as the core of how the U.S. tire market will roll over the next few years.

Where is My Recovery?

hire-me-college-gradsThe numbers say that we’re well on our way to a healthy, growing econo­my. U.S. stock markets are riding high, with the S&P 500 inching ever closer to maintaining a 2,000 level and the Dow Industrials flirting with a solid 17,000, sure signs, many feel, that happy days are indeed here again.

The numbers also say that there remain many critical problems – not the least of which is psychological – that are serious roadblocks to a com­p­lete recovery. If the stock markets are the lone measure, then continuous chatter among “experts” that a sharp free-fall is just around the bend (a 6,000 Dow anyone?) means that the skies above may not be all that clear again.

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Perhaps most concerning is the psyche of the American public. Rem­em­ber, ours is still a products and services-driven economy. Americans cut their spending at the first hint of trouble and are slow to the cash reg­isters when the smoke clears.

And while there has been retail and wholesale improvement during the last 18 months, nearly 50% of Americans believe we’re still firmly in a recession, according to a recent Wall Street Journal poll. A separate June survey found that only 39% of Americans felt the economy was improving; 56% said it was getting worse.

“The economic recovery cannot be measured only by market returns, growth in gross domestic product, and housing starts,” a recent BusinessWeek story read. “Psychology counts. Height­ened fear can hurt career and investment decisions for decades. Put another way, economic well-being requires a certain level of optimism, a firm belief that success is possible, even when times are hard. Markets crash. Businesses fail. But if people today are unwilling to take measured chances, we haven’t recovered at all. That may affect career and investment decisions for decades.”

Like the fits and starts that have dot­ted the U.S. economy of the last seven years, positive and negative takes on “The Recovery” come in similar bits and pieces. Added up, it is little wonder that Americans are screaming loudly:

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“Where is my recovery?”

  • Current thought is GDP growth will be 3%+ in the second half of this year, and will end up at 2.1% for 2014. Says Bill Strauss, senior economist with the Chi­ca­go branch of the Federal Reserve Bank, GDP grew by 2.6% in 2013, but will improve by 2.4% this year and 3% in 2015. The biggest con­straint, he said?

Consumer spending.

  • Gratefully, core inflation (min­us food and energy) remain­ed low and steady at just over 1.2% in 2013. But people still need to eat and drive, so higher meat and vegetable prices and for the fuel needed to get to work and the market take up a larger portion of already flat wages. Core inflation, though, is pre­dicted to rise 2% in 2014 and 2015.
  • Kiplinger Report calls for crude oil to float in the $95 to $99 per barrel range though to 2015.
  • A survey by Sentier Research shows that median household income rose 3.8% to $53,891 in June. Tempering that, median income remains 3.1% below June 2009 levels, primarily due to high unemployment during the early stages of the recovery. Some experts say now that wages will pick up in 2015, reaching 4% annual gains by 2017.
  • Between July 2008 and July 2013, median household income fell 5.7%, while the cost of goods and services (as monitored by the U.S. Bureau of Labor Statistics) increased by 7%. Few consu­mer products saw price drops – toys, TVs, books and gasoline among them – during that period, while staples – food, child care, vehicles, medical, clothing – all saw double-digit price increases.
  • Speaking of American households, a June 2014 study by the Russell Sage Foundation showed that median house­hold net worth in 2013 was $56,335 – 43% lower than the median net wealth level in 2007 (just before the Great Rec­ession began) and 36% lower than 10 years ago.
  • “Unlike many individuals who will be celebrating with the next labor re­port, I will not be,” said Strauss in his Global Automotive Aftermarket Sym­posium presentation in May. “I will have to wait quite a while to celebrate be­cause…we should not be happy that we’re just back up to the level of employ­ment that existed back in 2008. We want to see it up to the levels that we should be, given the growth of our population and of our labor force.”
  • The spring crop of college grads seeking their first jobs faced a still tight market – grad unemployment hovers around 8.5%, according to Kiplinger Report. Of those successfully landing, 17% will end up under-employed (job and wage below expectation), and 40% still living at home in order to pay down student loans.
  • Wells Fargo research showed that the bottom 20% of wage earners saw their after-tax income fall, and it increas­ed only slightly for the next 20% block of employed Americans.
  • Finding a steady full-time job has become harder. Per Kiplinger, part-time jobs now represent 18.8% of all jobs in the U.S., up from 16.5% pre-recession.
  • While recent job reports have seemed more positive, there are still some underlying weaknesses. Even with experts seeing the unemployment rate dropping to 6.1% by the end of the year, employers are still slow to hire. Govern­ment data for May showed that there were 4.6 million unfilled jobs, 20% more than 12 months ago. The problem: cur­rently unemployed Americans – said to be 9.7 million eligible people – may not have the skills necessary for the available positions.
  • Federal Reserve Chairman Janet Yellen calls it “shadow unemployment.” It is those individuals who have been unemployed for so long that they have stopped looking and removed them­sel­ves from the unemployment rolls. They are people who sorely want jobs, but cannot find employment at any­where near the level they were before losing their jobs to economy-driven reductions.
  • Yellen sees the decline in labor par­ticipation as a longer-term concern, and hopes that as the economy recovers, more of them will re-enter the workforce. Until then – if even then – this shadow unemployment could be “permanent damage” to the labor force.
  • It is also, as Strauss pointed out in his GAAS presentation, a growing num­ber of work-age seniors who have eff­- ectively retired. While they are being counted as “unemployed/not looking,” that is less of a concern than the fact the American workforce is quickly graying.
  • Speaking of the American psyche, income inequality is not a TV buzzword or mere illusion. It is a very real disparity that impacts how Americans see their future opportunities and weighs on their likelihood to spend. That the wide-rang­ing reluctance to spend has a negative trickle-down effect that reaches from the kitchen table back to the factory floor and to a still-troubled housing market.
  • Looking forward, the Millennials – and to a degree the Gen Xers – are showing growing reluctance to make investments in cars and homes, further damping “full recovery.”
  • On the better news front, passen­ger vehicle sales for 2014 promise to surpass 2013’s 15.5 million units. 2014, according to the National Association of Automobile Dealers, looks to come in at 16.4 million cars and light trucks. While new car sales growth continues to take consumer tires out of a predictable replacement cycle, the fact that vehicle sales continue to trend upward is a positive long-term sign.
  • On the commercial side, 2014 sales of Class 5-8 trucks remain solid – in a year when little good news was expect­ed. Through July, according to ACT Re­search, Class 8 tractor orders re­main­ed “on the high side,” with year-to-date order tracking 33% ahead of the same period last year. Class 5-7 unit sales are running about 10.5% higher than the same period year-on-year.

Our China Syndrome

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As I sit here writing this, weeks before you will read it, I realize that the reality on the day you read may not follow the narrative, but frankly until actual ac­tion is taken, all anyone can do is guess. So here it goes.

First, let’s settle on this: There will most definitely be an additional tariff placed on consumer tires imported from China. Not just Chinese-branded tires, but any P-metric or LT-metric tire pro­duc­ed there that ends up here. It’s a done deal, decided seconds after the petition first reached the Commerce Department.

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How large a tariff will depend on how much the Commerce Depart­ment and International Trade Commission feel the American tire industry has been “mat­erially injured or threatened with material injury” because of these tires, which the USW claims are being sold here at less than “fair value” and are allegedly sub­sidized by the government of China.

Some observers rightfully point to the question of subsidies by the Chinese government. There is little doubt that Beijing aids its tire industry, as it does for much of its industrial base. In fact, if you dig deep enough you’ll discover that the Chinese government is at least a part owner of hundreds of product manufact­urers – including tiremakers.

China is a still-growing economy, building up in both volume and tech­nology to service a population five times that of the U.S., a population that has the same aspirations Americans have held dear for decades.

It has emphasized the automobile and tire industries as key to its overall growth, and it has taken steps – finan­cially and via regulation – to weed out the weak, low tech players and help the stronger auto- and tiremakers become world-class producers.

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China is not the first or only govern­ment to help its industrial base. What are we to make of the tax abatements, infra­structure improvements, “training” money and other incentives, and allow­able tax deductions showered down on tiremakers in the U.S. (regard­less of their country of origin) as pot sweeteners to either land a new plant or keep an existing plant planted?

Aren’t those, in fact, government subsidies? How do those investments impact tire pricing? Or do those offsets simply fall to the corporate bottom lines that have been quite robust in recent years?

You’ll recall the tiered administrative action of the 2010-12 period, where Chinese-produced consumer tires were slapped with 35%-30%-25% added tariffs. With the tariff, American consumers were paying an additional tax on their tire purchases, and, unfortunately, at one of the worst economic periods in our history.

The result? No new tire plants. No new tire jobs. Not anything the USW purported was their cause.

Instead, we got more used tires sold, massive tire pricing surges, burgeoning new tire inventories, and more tire deal­ers left in the dust.

The eternal question on the rapid growth of Chinese brands in the U.S. is a chicken-and-egg quandary: Have we been importing more China-produced con­sumer tires because of lower acqui­sition costs or because tire buyers can-­ not afford high-priced premium lines?

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If it were the latter, then would it not make sense for U.S. manufacturers to return a certain level of “broadline” tire production to this continent? If it is the former, then based on our competitive economic system, a laissez-faire app­roach should prevail.

Certainly, once the last tariff came off in September 2012, imports of con­sumer tires from China jumped 36.9%. At the close of 2013, China-made products represented 30.5% of all consumer tires imported into the U.S. and 22.6% of the entire U.S. replacement consumer tire market.

But for comparison sake, consider that 2013 radial truck/­bus tires shipments from China represented 61.6% of all TBR units imported into the U.S. One ind­ustry expert says China now meets 55% of the global demand for truck tires.

Yet, the United Steelworkers – a labor body that purports to stand up for the “little guy” – has focused its resources on the more volatile consumer tire side.

We are not pro-tariff , but we are not anti-American worker. We are pro-choice in that the market and the buyer should determine the outcome.

Any drastic tariff action – regardless of the country of origin – is wholly anti-con­sumer, anti-choice and anti-tire industry, and serves only for the USW to force tire buyers, still stumbling after the Great Recession, to pay artificially higher prices.

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American tiremakers (and those of foreign origin) long ago aban­doned the broadline segment that products from China and other countries now fill. Production of those tires – the 14-, 15- and 16-inch radial sizes that remain prevalent in this market – didn’t race back to these shores with the last tariff rise.

The USW’s stated reason for pur­suing the last added tariff proved to be a sham and a shame, and so is this push for what will likely be far a more pun­ish­ing and longer-lasting added tax.

The only thing that any new tariff will cause is massive market disrup­tion, worse than that we experienced between late 2010 and 2013. Tire prices will rise, to be sure, and across the board, particularly on “pre­mium level” tires.

That will bring even more wallet stress to already fragile and wary con­sumers and further business stress on tire dealers – and that may come back to haunt union leadership in the form of lost jobs.

Of course, the other end result will be a move to these shores by two or three Chinese tiremakers – by local acquisition, or by inheriting a U.S. plant through an offshore acquisition, or by planting their flag with a greenfield plant. They want to compete with the best in the world in the toughest market, and they will show up ready to play.

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The USW can swat at globalization all it wants, but this is a different world and maybe it needs to take a good look in the mirror. Until consumers show a will­ingness to pay premium prices or union workers accept more manageable wage/benefit structures, high impor­tation rates will be the case.

Today, the USW is fixed on China. Tomorrow?

 

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