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Editor's Notebook

Pushing Rope?: How High Will Another Price Increase Fly With Strapped End-Users?

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Rumblings are up about an upcoming round of across-the-board tire price hikes. No one should be surprised. Legacy costs, operating costs and, most especially, raw material costs, are chewing up tiremakers, especially those on these shores.

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The price increases invoked over the last three years have certainly been warranted, and, for the most part, those bumps have justifiably stuck. And, I really can’t argue about the additional 5% to 8% expected by fall.

But, have we reached the point where some market segments are maxed out? It is certainly a question worth asking.

Raw materials, processes and equipment and labor are the only variables a producer can control. At present, no tiremaker – large or small, foreign or domestic – has any control over raw material costs.

And, truth be told, North America does not have a wealth of automated, low-labor-cost tire plants. What we do have is an aged infrastructure and nearly untenable labor contracts.

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Of the 58 active tire plants in the U.S., Canada and Mexico, 41 of them – 71% of North America’s capacity – went on stream prior to 1975. Only seven were built after 1990, and only four are fully or partially automated. Toyo’s new plant in Georgia will give us five.

Sure, these older facilities have been upgraded through the years. But old is old. And when only 7% of your capacity is automated, you’re paying big, big bucks for labor. Expect to see a number of these facilities shuttered soon as new plants come on stream elsewhere in the world.

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Where are all the new tire plants being built? Low-wage places like China, Southeast Asia, South America and Eastern Europe. That’s the only logical way tiremakers – and other manufacturers – can control production costs, especially with labor-intensive goods.

Cry all you want about losing American jobs to outsourcing, the cold, hard reality is the bottom line. Investors demand a fair return. Distributors want a fair price. And end users insist on the lowest possible cost.

Why haven’t North American tiremakers embraced automation? I have no idea. Maybe it’s the legal difficulties of putting thousands of union workers out on the street.

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2006 will be a watershed year for the tire industry. Next year begins another round of master contract negotiations between Goodyear, Bridgestone/Firestone and Continental and the United Steelworkers (USW). It will not be pretty. All three tiremakers will be looking to improve their positions. Not only will general wages be an issue, but outsourcing, plant closures, health care and legacy costs will be sticking points.

Given the state of the global tire industry, I don’t see how the USW will win much. If there is a multi-company strike, however, nobody will come out in good shape.

Complicating union contract matters is talk that the rank and file are not too happy with national USW leadership, which many see as being largely unfocused and distracted by other matters (and, of course, by its core steel industry) to pay much mind to the rubber plants. Some internecine politics at the local level, I understand, have also resulted in workers getting bad information and direction from their elected leaders.

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So, what does this mean to the capacity of end users to absorb more price hikes?

On the commercial side of the ledger, probably not too much. The medium truck and OTR tire markets are red hot right now and will be for at least the next two years, experts say. That means customers will pay more for tires – for now, and grudgingly. But, they will pass those increases on…to consumers who buy the goods they produce and ship.

Consumers are another matter. Their “raw material” costs have gone through the roof, too. Since 2002, overall consumer prices have jumped 8%. Gas is up 55% alone. Bread is up 10%. Meat another 18%. Milk plus 14%. Electricity volted 11%. Let’s not forget medical insurance costs and the property and sales tax increases most folks have been hit with thanks to shrunken state coffers.

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Average pay increase for non-managerial workers – about 80% of the U.S. workforce – for the last two years? 2.7%.

Few consumers appreciate tire technology, and fewer realize how they have been underpaying for years. Today, for most of your customers, tires are firmly a discretionary buy.

So will they buy another 5% to 8%? I doubt it. And, this issue could have significant ramifications on the majors as lower cost imports become the choice for those trying to stretch the family budget.

Is that a good thing? No. But that is the reality of the situation. North American tiremakers are not swimming in profits, and any serious tightening in the consumer tire market is not welcome news.

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