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Downward Turn: Small OTR Market Sees Sales Slump, Overcapacity

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Not that many months ago, the OTR market – small and giant tires – was flying high, burdened with lengthy backorders that kept prices up and production humming. Tires were hard to come by, a happy problem the industry enjoyed for half a decade.

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The global financial crash and burn – complete with sharp downturns in housing, building and infrastructure construction and fast-falling commodity prices that curbed a lot of mining – put an end to that problem, creating in its wake a small OTR tire segment fraught with depressed prices, overcapacity and declining sales.

“We do business on a global level and for sure business in this sector is off
as much as 30% depending on the market,” said Jeff Kreitzman, CEO of American Pacific Industries. “We’ve seen our customers scramble to reduce their inventories to meet today’s reduced market demands. So it makes that sales look much worse than they really are.”

Kreitzman, who expects 2009 to remain slow, said one serious problem is an over abundance of product. “Too many tires and not enough sales – this is perfect storm for price reductions. Dealers need to do a good job of managing their inventories and making sure that they have what they need when they need it. Because tires will still be sold, but if you do not have it you cannot sell it. Then you send your customer out shopping.”

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CMA sees much of the same taking place. “At the dealer purchase level, high inventories and slow demand have translated into a significant slowdown in purchases,” a company spokesman said. “The lack of construction, mining and other industries is taking its toll on demand. At the end-user level, the slowdown has been devastating due to idle equipment and the shutting down of jobs in construction and mining. There is a lack of demand for materials and services and that is creating slow or no tire wear due to
inactivity.

So where would a smart tire dealer focus their attention? “In our estimation, small fleets tend to be overlooked by dealers during times of prosperity,” CMA said. “Today, smart dealers should focus on all opportunities and any size customer or fleet. Service means everything, not just price.”

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Long-time OTR industry veteran Gary Nash, director of OTR tire sales for Yokohama Tire Corp., has seen many ups and downs in the segment, but perhaps none as severe or as interwoven as today’s declines. But, there are still some niche areas dealers can take advantage of, in his estimation.

“The downturn in the economy has severely impacted the housing market and small construction, and site preparation for new homes is virtually at a standstill,” Nash said. “And that downturn has also impacted the demand for aggregate, which, in turn, has further impacted the demand for small tires used in the rock industry.”

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When the market raced ahead and tire shortages began back in 2003, he said, the major tiremakers added capacity and upgraded facilities to address demand. Continued shortages opened the door to Chinese, Indian and eastern European makers to step in. So now, with the market in sharp decline, “the small OTR categories – bias and radial – have gone from a short supply to over supply.

“The end-user,” Nash said, “now has many choices but is moving very cautiously, only purchasing what they need.”

Niche markets, like underground mining tires for the coal market, container handler tires and other specialty tires, he said, provide dealers with some opportunities.

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Small OTR products don’t appear to be in short supply, to be sure. “In small OTR sizes, there is virtually no supply issue today, nor has there been for the last 12 months,” said CMA officials. “With the slowdown in demand and the increased global manufacturing capacity, the market is saturated with 25-inch product. In the large and giant OTR segment, there are still tire shortages in many 35-inch diameters and above. But with the recent downturn in mining and other materials, it is becoming less of an issue than in 2007.”

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Part of the market downturn came from the OE side of the market, said Nash. “Twelve months ago we saw the OEMs slow production of new machines due to the poor demand for new equipment. Many of them had over bought tire inventory due to the shortage, much like tire dealers.”

With all of those unused OE tires on hand, the end result was an even bigger glut of available rubber.

“At present, we are managing the need for small OTR products and producing mainly specialty tires, and we’re converting some small tire capacity to large and giant OTR products, which continue to be in short supply – but not to the extent of previous years,” Nash said.

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With a market rife with available product, API’s Kreitzman sees more potential troubles ahead. “Unless we get this economy going, specifically the construction business,
this segment will stay soft for the time being,” he said. “Once it turns, and it will,
hold on because it will be very fast ride.”

“The global economic recession will continue to affect construction, mining and material handling,” CMA said. “If the economy stays flat or contracts, conditions could worsen due to the financial insolvency of many end-users. Dealers can best prepare themselves by managing inventories, focusing on service and understanding the customers’ newly forming needs in today’s fragile market.”

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A new president and a new direction may have a lot to do with the near-term future of the market, Yokohama’s Nash feels. “The decision by our new president to appropriate funds to repair highways, bridges and spearhead more jobs in the construction industry should be a plus as we go forward. Will this happen in 2009? Yes, but it may not hit until the fourth quarter of 2009. Lower interest rates will also improve the outlook for the housing industry.”

The demand will come back, Nash feels, but “dealers must concentrate on all segments of the OTR industry to survive, not just concentrate on one segment of the OTR market.”

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Despite all of its troubles, the small OTR tire market also has lots of room for growth through innovation. New technologies – or even continued shifts to radials – will make opportunities for dealers and tiremakers alike.

“We saw this market moving toward radials in this segment, until the economy and sales crashed,” said API’s Kreitzman. “Then buyers looked at ways to lower costs and switched back to bias ply tires.”

Still, when the market recovers, that migration may pick back up because operators are still looking for the best bang for their tire buck. “Even in today’s economic culture, TKPH/TMPH values are major forces that drive value and improvements in tire compounds and construction,” CMA said. “These key values will continue to drive development.

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“Dealers have become aware during the short supply period that products built with highly technical skills are more important than just price or volume,” Yokohama’s Nash said. “The end-user demands products that will retread several times. Therefore, poor quality is not and option or the answer.

“Tires must be built ‘job specific,’ and must be able to operate under extreme conditions. Is this more expensive? Yes, but not in the long run,” he said, also noting the true cost-benefit of high tech tires shows through in original life, retreadability and environmental impact.

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Just as with an economy that has drug it down, there are no easy answers for dealers competing in the small OTR tire segment. As it is with growing any business, the focus must be on delivering top value, outstanding service, and having access to the right products at the right time.

The market, as it always does, will come back. And those dealers who put a “back to the basics” approach to work today will benefit tomorrow.

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