For the past few years, the OTR tire market has presented many challenges for manufacturers and dealers alike. Rapid growth in developing countries, large amounts of military orders and the soaring mining industries in North and South America have caused a shortage that affects everyone in the pipeline, from tiremakers down to end users.
The good news for dealers is many manufacturers believe there is an end in sight. With smaller OTR tire sizes, supply already meets demand. And larger models should catch up in the next few years due to tire companies boosting their capacity, as well as new manufacturers entering the OTR market.
Although the toughest times may have already passed, dealers still need to be aware of the challenges, changes and pitfalls that could affect their business.
As difficult as it is to predict the future, manufacturers are doing their best. Several have pegged the end of the OTR tire shortage as being anywhere from three to five years away, depending on the tire size in question.
“For the larger sizes, the shortage is likely to last another three to five years. For small and medium bias tires, it’s probably pretty well caught up in most sizes,” says Gary Nash, director of OTR tire sales for Yokohama Tire Corp. “As for radial tires, there are still some shortages in small and medium, and lots of shortages in large and extra large.”
“The giant radial OTR tires will continue to be tight until the manufacturers increase capacity enough to meet the growing global demand, probably through 2010 or 2011,” says Ray Tremblay, manager of China Manufacturers Alliance’s Double Coin Radial OTR Division.
Jack Fenner, vice president of sales and marketing for API Inc., also says supply has caught up with demand in smaller tire sizes and has come closer to meeting customer needs in medium sizes.
“Generally speaking, the smaller the tire, the more available it is,” he says. “The shortage will continue in the large size tires. Worldwide mining efforts and the development of third world countries will continue to strain supply of the larger sizes.”
“For big tires, say above 49 inches in diameter, we are still experiencing a supply imbalance,” says Shawn Rasey, executive director of Bridgestone/Firestone North American Tire’s OTR division. “For 57- to 63-inch diameter tires, it is most acute. Supply for these ultra-class tires will continue to lag due to the longer lead time to ramp up capacity.
“Both Bridgestone and Michelin have made sizeable investments in ramping up capacity for these tires, but it simply takes time to get there,” he continues. “Demand on these sizes continues to grow, due to a global boom in commodities, so we are chasing a moving target.”
Easing the Strain
Each of these companies, as well as other tire manufacturers, have taken steps to address the shortage, mainly boosting production capacity.
Since 2005, Bridgestone, Michelin, Goodyear, Yokohama, Titan and Toyo have all undertaken capacity expansion projects, some with greenfield plants and others with additional equipment and floor space at existing facilities.
Companies like API and CMA have also expanded their OTR capacities.
API has increased investment in new production, as well as capacity at existing plants. Dealers can look for a new giant radial program in the Gladiator line that will be announced this year, Fenner says.
“Double Coin is working to deliver a better mix of radial sizes and types to meet North American and world demand,” Tremblay says. “We’re also on target to deliver radial 45- and 57-inch tires beginning in 2009. Double Coin is investing to meet the global needs for these types of tires for the long term. Our goal is to be the dominant manufacturer from China on these types of technologically advanced products and a significant player in the global giant OTR replacement and OE markets.”
The shortage has had a big impact in another significant way: the number of offshore OTR tire manufacturers that have cropped up. Although this trend means greater availability of product for dealers, it raises concerns about quality.
“The quality of the product is still suspect,” says Nash, who estimates that 15 new manufacturers have entered the U.S. market during the recent shortage. “Some of the Chinese and European manufacturers can design a product almost overnight, and get it in the field right away. But we know that it takes three to five years to properly test and perfect a large and extra large radial.”
“Some large radials have recently been introduced, but it is way too early to determine the overall quality for these sizes,” Rasey says. “On the small and medium sizes we’ve seen a wide spectrum of quality: some good, some not so good.”
Tremblay says offshore supply can be divided into two categories: One oriented to quality and the end-user, and the second oriented to “poor quality and poor performing products.”
“These types of products, when prematurely failing or giving poor performance, actually drive up operator costs,” he says.
Fenner says even though these new offshore tiremakers are gaining experience and improving quality, dealers still need to be careful. “Like other off-shore products, dealers need to buy from organizations that have the technical expertise, field representation, logistics, product liability and the financials to back their products.”
Trying to level the playing field, at least for U.S.-based producers, the U.S. Commerce Department recently ruled that Chinese companies exporting OTR tires to the U.S. must pay additional duties ranging from 2.38% to 6.59%. The duties are to make up for subsidies the companies have received from China’s government, including loans, tax breaks, government grants and access to low-cost rubber and land.
“It’s just putting everything a little more fairly,” Nash says. “I’m not exactly sure if Chinese manufacturers escaped all the duties they should be paying, but we have to pay a duty on our products coming into the U.S., and fair is the name of the game.”
“I support fair trade, and fair business,” Rasey says. “In some cases we have seen Chinese-produced tires at prices that are 50% below a Bridgestone, Michelin, Titan or Goodyear tire. In fact, I’ve seen selling prices to dealers that are less than our manufacturing cost.
“That tells me that there is a big difference somewhere,” he continues, “either in government subsidies, extremely low wages, or maybe that construction of the tires is simply not the same as U.S.-, Europe- or Japan-produced products. We’re not afraid of good competition, we simply prefer that the playing field not be tilted unfairly in one direction.”
On the other hand, Tremblay says customers are capable of choosing quality products over lower quality, lower priced products, making the ruling unnecessary. “Any additional duties will only increase the price to the customer, decrease the profitability of the dealer and restrict the availability of quality products like Double Coin to them,” he says. “Double Coin could be unjustly penalized in the North American market because of decisions made by many companies to take the low-cost, low-priced bias production from the U.S. to the Pacific Rim.”
Dealers must also be on the lookout for inflated prices from companies trying to make money by taking advantage of the situation. “Anyone can sell a tire to anyone else today because there’s such a short supply,” Nash says.
It’s that fact which has enabled some manufacturers to raise tire prices substantially, beyond the amount necessary to cover rising raw materials costs.
“Many companies have taken advantage of the short supply and raised their prices more than what the cost of the goods has increased. In reality, the rising costs of oil, raw rubber and steel have almost eaten up any chance for profits,” Nash says. “Dealers are going to recognize those who maintain a good relationship with them during this shortage.”
“Anytime there is a shortage of anything, people will pop out of the woodwork and try to capitalize, regardless of their expertise or lack thereof,” Fenner says. “Dealers need select suppliers based on integrity and know-how.”
The End Result
With added capacity and new competitors, will there soon be a glut in the OTR market? Yes and no, makers say.
“I see this (a glut) being more possible on smaller tires,” Rasey says. “For large and giant sizes, it could happen in the long term maybe, but not in the near future. The technology barriers to entry for the bigger tires will simply take longer.”
Tremblay says there is already a glut in the market for low price tires because demand has increased for these products even as the availability of quality products has improved. “It does seem that manufacturers are increasing production beyond demand but the global market will determine the supply,” he notes.
“I don’t think I would call it a glut, but refer to it as more consistent supply than what dealers have seen the past three or four years,” API’s Fenner says. “It’s been that long since dealers have been able to readily get many sizes and types. Worldwide production has finally caught up with the demand in many of these sizes, especially the smaller sizes, but the world continues to industrialize and the usage of these types of tires continues to grow.”
“The market historically has had many peaks and valleys,” Nash says. “It’s had five years of strong growth and then five years of no growth that had no one, including Yokohama, doing anything to expand production.
“Some were even considering closing their plants because there was not a very strong demand, but this sudden change in supply/demand caused everyone to recover quickly,” he continues. “It has given a little bit of relief to companies to go ahead and improve their production for all sizes of OTR tires.”
What to Expect
One other result of the growth of offshore sources may come as supply and demand rebalance: the relationships between tire company, dealer and buyer may change significantly.
As things stabilize, Tremblay says, “Dealers can expect that a customer’s decision will again be based on the performance and quality of a tire instead of availability. But manufacturers will have to earn their business again. The market will return to a value-purchase type, but end-users will have more quality choices.”
“You’re going to see a very close-knit dealer-manufacturer relationship,” Nash says. “Also, a lot of sharing of information and support given by the manufacturer to make the products perform adequately.”
“It’s been difficult to keep our dealers happy, to make sure they have products so they won’t have to go and buy an off-the-shelf product,” he continues. “We’ve all learned a good lesson, from the dealer to the end-user to the manufacturer, and that’s been that it takes total communication and cooperation to exist in a market like we have today.”
Extending OTR Tire Life
With many OTR tire sizes in short supply, manufacturers are encouraging consumers to take the necessary steps in making the tires last as long as possible. Bridgestone/Firestone North American Tire holds educational seminars to address this particular issue.
At an October 2007 media event at BFNAT’s OTR plant in Bloomington, Ill., National Manager of OTR Training and Development Jack Dutcher shared the basics of tire care and maintenance, aimed at extending tire life.
The first step is matching the correct type of OTR tire with the application it will be used for, whether it be mining, construction, earth moving or logging. Be sure to find a tire with the appropriate amount of traction, cut resistance and speed for the job in order to maximize productivity, Dutcher says.
Once equipment owners fit a vehicle with the correct tire, there are several tips he offered that extend tire life, including maintaining proper air pressure, regular inspections and repairs, and reducing excess road water since tires cut easier when they’re wet.
Maintaining air pressure is more than just checking the psi of a tire. Pressure must be adjusted depending on the weight of the load, so tires should be inflated to their “designed shape” for each load. Pressure checks must be done at least weekly, and in the morning to obtain the cold inflation temperature. A log of all checks should be kept to track each and every tire.
At the beginning of each shift, tires should be inspected for new cuts, cuts that have grown, bulges and cracks, and rims examined for loose or bent parts. Develop a procedure so that follow-up action will be taken if there is a problem with a tire or rim.
Lastly, when a tire becomes worn or damaged, it should be considered for retreading or repairs, since today’s OTR market no longer allows for a simple re-order and quick fulfillment.