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Good Times, Hard Times: With Global Demand Straining OTR Tire Supply, Dealers Must Again Look to Customer Service For Profit Growth, Experts Say

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After five or so years of just scraping by, the North American OTR tire market is enjoying a happy problem – warehouse-emptying sales. In fact, the global OTR tire business is having the same problem.

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But that happy problem has created a larger, more ominous issue: inventories are virtually non-existent, backorders are heavy and manufacturers are scrambling to secure much-needed tires. Loader and haul truck tires are pretty much sold before they’re even made. And, adding capacity takes so long that the boom may be bust before the first tire can roll off any new lines.

Not exactly a perfect storm.

Still, no one is complaining too much. Squeezing manufacturing capacity is a lot more fun than watching dust grow on unsold tires. While tiremakers wished they had more tires to sell, the severe shortage is placing a greater burden on tiremakers and OTR tire dealers to help end users get everything possible out of their tires.

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Driven primarily by heavy demand from China and, to a lesser extent, India, global demand – and pricing – for commodity ores (like iron and copper), coal and oil are at all-time highs. And precious metals (gold) are also experiencing higher pricing in the market.

Domestic and overseas commercial and transportation construction, especially in China, is pressing aggregate operations to the max. U.S. housing construction remains solid, and major domestic road construction projects are already on the books.

Industry watchers say 2005 will be up again over 2004, and these “good times” won’t abate before the end of 2006 – if then. Everyone in the OTR tire business knows how cyclical it is, so all the players are trying to make that proverbial hay while the sun is shining.

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But all of this success will exasperate an already tight supply situation. Tire demand that was, at best, flat in 2003 jumped 20% in 2004, according to one industry expert, and will likely rise another 20% this year.

Because of all this mining, aggregate and construction activity, “previously parked vehicles are being put back in service, contributing to the strong demand for OTR tires,” said Manny Cicero, vice president of Bridgestone/Firestone North American Tire’s (BFNAT) OTR tire sales group.

“This demand is unprecedented in the history of the industry and was unanticipated by the industry,” says Todd Ramsey, director of marketing for Michelin North America’s (MNA) earthmover tire group.

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Supply Constraints

For their part, tiremakers are doing what they can to improve supply. Continental Tire North America (CTNA) is bringing some small radials in from Europe and is working to improve supply, according to Bob Harnar, director of sales and marketing for CTNA’s global OTR unit.

(Editor’s Note: CTNA announced in January that it was looking to sell its Bryan, Ohio, OTR tire plant, its only domestic OTR tire production facility.)

Ramsey says MNA’s two North American OTR plants “have maximized production” and are “running flat out.” The constriction is worldwide, Ramsey says, and not easily solved.

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Goodyear Tire & Rubber Co.’s Rob Andrews says that, when the economy and demand was flat, tiremakers did not invest in capacity expansion. “But when demand picked up in the second half of 2004, OTR tire inventory reserves were sold off quickly.” Goodyear, Andrews says, “is exploring ways to increase OTR tire production quickly,” primarily by improving manufacturing efficiencies.

To forestall negative impacts from tight tire inventories, Goodyear’s Andrews suggests dealers and end users “consider bias OTR tires rather than radials, as well as retreads and even used tires – if it makes sense.”

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BFNAT, which has a domestic OTR plant in Bloomington, Ill., also sources product from Japan and Australia. Cicero says capacity for small and medium OTR tires is being doubled at the plant in Hofu, Japan. Calling 2004 demand “feverish,” Cicero says that, for 2005 at least, BFNAT is “being forced to consider tire allocation as a method to ensure a fair distribution of product.”

For companies like BFNAT, Toyo Tire USA and Yokohama Tire Corp., as well as brands from China, things are even tougher. Docks up and down the West Coast are so backed up that any tire shipments arriving there are tied up for weeks before they can move on to distribution centers. In an ironic twist, the extra work at those docks is creating additional demand for material handling tires.

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Well acquainted with the vagaries of their businesses, mine and quarry operators have welcomed the market improvements with open arms, but not open wallets. After years of pressing for every service hour or mile possible from their equipment and tires, mines and quarries are still pushing hard for dollars-and-cents improvements. They know they’re making money today, but they want to stay in a position to succeed when the inevitable crash comes.

One cost factor not addressed heavily in the past is fuel. Large equipment eats up large quantities of diesel and gasoline – all of which floated around the $2 per gallon mark last year and show few signs of abating. What does this mean to OTR tiremakers and dealers? Another operating cost has to be dealt with – somehow.

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Technology Changes

“Major mining companies can gain millions of dollars in additional revenue by simply improving their equipment utilization rate by a percentage point,” says MNA’s Ramsey. “So, they are willing to apply and share best practices towards this goal. Tires are a huge part of this. Better-performing and longer-lasting tires have a positive effect on uptime.”

Tiremakers are tackling their part of that equation with technology improvements. BFNAT’s Cicero says “subtle” technology changes have enhanced real-life performance. Advanced carbon black formulations and increased use of silica have improved wear resistance by 10% to 20% without impacting heat resistance, he says, which has allowed for deeper, longer-wearing treads. Higher angle belt packages restrict casing growth in service, reducing casing stress and fatigue.

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Harnar believes all OTR tiremakers have done a lot to improve their tires, particularly in “special applications” like container handler and log loader tires.

Ramsey agrees that the most significant technology improvements have come in tread compounds, but he also cites “new architecture,” in the form of 80-series units, as a breakthrough in the tire performance/tire life battle.

“But there are also significant gains with better air pressure maintenance and tire management programs,” he says. “Tire performance improvement is a mutual task, in which both the manufacturer and end user have ongoing responsibilities.” And that’s where dealers also come in.

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Andrews from Goodyear concurs. “More than ever, a close working relationship between dealer and end user is key, as both parties work toward achieving proper air pressure, wear rates and overall maintenance – factors that affect the possibility of longer usage.”

Dealer Opportunities

Given the supply situation, OTR dealers can’t depend on tire-sale profits, so once again, they have to look at service opportunities to meet revenue needs. Even the smallest end users, says CTNA’s Harnar, keep tire performance records and are quite concerned about tire maintenance as a means to extend service life.

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But this does not happen without help from the tire manufacturer. After years of tension created by tiremakers granting “national account” status to more and more end users, relations may have leveled, according to Cicero. “Dealers have come to recognize that operators have grown increasingly sophisticated and that tiremakers are being asked to deliver ‘solutions’ instead of tires,” he says. “The dealer is a large part of the ‘solutions’ package.

“We are in this boat together,” he says, “and neither of us can go it alone.”

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“The relationship between the OTR tire dealer and the tire manufacturer is critical in meeting customer needs,” Ramsey says, and he feels national account programs “present opportunities to dealers” looking to povide value-added services. “Mines and quarries are looking to sophisticated tools like tire management software to assist our dealers in providing greater value to the end user,” he says.

“If the dealer and manufacturer have a mutual customer, the odds are that customer will be taken care of effectively,” says CTNA’s Harnar. “If the dealer hasn’t worked with the manufacturer’s customer, it might be a different story.”

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Continued end-user consolidations, though, have created a situation where “large companies are buying smaller ones, and those smaller operations are demanding more ‘national account’ status.” Because of this, he says, tiremakers depend more than ever on dealers to deliver excellent service.

Service, Service, Service

Beyond the fundamentals, the experts offered these customer-service opportunities savvy OTR tire dealers must have in their portfolios:

• Detailed fleet inspections to understand the state of tires;

• Accurate tire forecasts – with adequate lead time – to ensure tire supply;

• Ensure tires are being used to their maximum life, even if it means pulling them early for proper repairs and/or to protect retreadability;

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• Report tire conditions to customers accurately and regularly, and make specific recommendations to extend tire life;

• Keep emergency response time – from call to being on-site – to under two hours;

• Be technically proficient in product knowledge and application;

• And understand and utilize an effective tire management system.

The bottom line, as Ramsey says, is that end users expect the dealer to do more than just sell tires.

And, despite the current prosperity, “the situation has not really changed much over the years,” says Harnar. “Dealers must focus on being valuable partners with their customers. They must be considered problem solvers. That is the real meaning of service.”

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