Sonic Bust - Tire Review Magazine

Sonic Bust

Sonic Bust

Can we rebound form a speed-of-sound decline?

 

It’s fair to say the medium truck tire market is sagging. Stagnant at best. Fleets are filing Chapter 7 and 11 at a record pace. There is a surplus of used trucks just waiting to be bought. Production of new trucks is at a trickle. New rubber isn’t being spent to make way for replacement rubber. And the economy is anyone’s guess.

The industry has taken a downturn, and a quick one at that. It wasn’t too long ago that the ship was right and the sailing was smooth. The economy was booming. Industrial sectors were growing. Materials and products were transported at record rates.

Then, after three years of hot-n-heavy growth, the bottom fell out. While growth didn’t halt all together, it slowed. And it hasn’t stop slowing.

Now the market is depressed and the immediate future doesn’t look good. The market will pick up – eventually. The only question is, when?

On the Decline
There had been some foreshadowing that a depressed commercial market was coming. Sales of new Class 8 trucks (and OE tires) declined sharply last year versus 1999 and certainly compared to 1998.

The replacement tire market suffered, but can’t pick itself up until the OE tire market – which is dependent on OE truck sales – picks up. It’s a vicious cycle.

"The replacement market strongly depends on filling the wheel positions of OE tires at wear-out, but there are other factors such as the shipment of freight, industrial production, and consumer confidence, all of which are dropping," said Randy Clark, vice president of marketing, Michelin. "At this point, it seems that replacement shipments this year will be below 2000 levels, but it’s too soon to project."

So if the OE truck market picked up, the replacement market should quickly follow, right? Not necessarily, says Bill Forsch, manager of fleet/OE sales for Yokohama. "Normally, yes. However, we currently have an excess of equipment in the marketplace, so many tractors and trailers are simply being parked.

"Parts, including tires, are being scavenged from idle equipment to keep other equipment running. This can’t continue long term, but currently we aren’t seeing the benefit of a lower OE cycle like we normally do."

Much of the depressed commercial market is evident in that 2000 was a record year for fleet bankruptcies. If this trend continues, marketshare and growth opportunities for tire manufacturers will be limited.

"Of course the loss of any receivables from your portfolio isn’t pleasant. It’s very painful," said Forsch. "We think that a lot of the carriers that have fallen out would have fallen out at some point in the future due to poor business practices, so a natural cleansing is normal.

"Are we comfortable with it? No. Is it profitable? No. But was it inevitable? Yes."

"The bankruptcies mean that the trend toward consolidation will increase and that more fleets will be looking not just for tires but solutions to their problems," said Clark. "That’s why we’ve focused on an approach that was designed with such fleets in mind."

But when fleets are going down and both the OE and replacement markets are stagnant at best, that’s a big indicator that there is something worse brewing on the horizon.

Economic Downturn
For nearly a decade, the U.S. economy thrived. Growth of nearly every kind soared through the roof. The stock market increased exponentially. Unemployment fell. The Bull Market was rampaging across the country.

But things slowly started to dip. Mild downturns at first. By mid-2000 the whispers turned into grave concern. Since the start of 2001, it’s been a flat out freefall. And it doesn’t look like it will get any better for the rest of this year. Spending is down, the stock market is down – three quick rate cuts haven’t done enough – and a huge tax cut likely won’t find its way through Congress fast enough.

All of this has left nearly every market – including commercial – leery and scrambling for answers before the economy hits bottom. But how closely tied is the truck tire replacement market to the general economy? And is there anything on the horizon to indicate an upturn?

"The two are very closely tied," said Earl Knoper, senior vice president of marketing for Toyo Tire USA Corp. "Up until sometime last year, we had nine years of consecutive monthly economic growth in the U.S. That’s tapered off and now we don’t have the growth.

"I think the slow down of the economy directly impacts the OE and replacement markets. In three to six months the commercial market isn’t going to improve substantially, if at all. Maybe this recent interest rate cut will jumpstart the economy.

"We need an upturn and we don’t see the replacement market picking up. The decline has resulted in less ton-miles hauled by carriers, which negatively impacts the replacement market."

Many of the tire manufacturers share that same view. The replacement market and the general economy are so intertwined that tire sales aren’t going to increase by themselves.

"The medium truck tire replacement market is tightly tied to the manufacturing and construction sectors of the economy," said Clark "With manufacturers abruptly cutting inventories, it’s unclear how quickly factories – and hence shipments – will return. If the adjustments are one-time corrections, there could be a return to normal shipping by the third quarter."

"The best gauge I believe to monitor is industrial production," said Dave Beasley, Goodyear’s general marketing manager for commercial tires. "If manufacturers are producing goods, then those goods have to be transported, which is good for trucking and the truck tire market."

The immediate outlook for the market doesn’t look good. All factors are pointing toward a continued slowdown in production, transportation and, therefore, replacement.

"If the replacement market is good, it usually indicates that base products – wood, steel, parts, fuel, machinery – are being transported, and they’re also wearing out tires, and that people and companies are paying for those things," Forsch added. "If the replacement market is soft or slow, usually nothing is moving. The next three to six months will be tough. The previous years – 1998 to 2000 – won’t be matched."

The Perfect Storm
If the previous years won’t be matched, then where does the market currently stand and what is expected? The source of the problem doesn’t lie in the replacement tire market or even the OE tire market.

The source is the Class 7 and 8 new vehicle market.

"There has been almost a perfect storm that converged on the industry," said Thomas Duncan, publisher of Fleet Owner, a leading magazine covering the trucking industry. "There have been a series of factors that came together to create this situation.

"We had a period when interest rates were increased six times in a year. The used truck market is a logjam, which in turn has depressed both new and used truck prices. Manufacturers are now being put in situations where they’re upside down in their loans. Fuel prices spiked quickly. Labor has been difficult to find, which drives up labor costs.

"You’ve got all theses factors and now you’ve got the general economic slump which is causing a weakness in several fleet sectors. Any one of these factors would have had an impact on the truck OE market alone, but all of them have come together at one time and the result is what we currently have."

Changes For Dealers
As you would expect, all of this has a negative impact on tire dealers. The grassroots level is usually the burned the fastest when the economy goes south. But dealers adjust.

 

For a while now, selling to fleets has involved more than simply placing and dropping off an order for tires. The process has evolved far beyond that. Service is now critical and many dealers are taking over nearly every aspect of fleet tire maintenance.

But the service relationships between truck manufacturers and their dealers – as well as truck stops – have impacted a tire dealer’s ability to compete for and profit from fleet service.

"The change we face is tremendous," Forsch. "Yes, service relationships of the truck manufacturers and their dealers on the surface appear to be daunting for the tire dealer group. However, with change, opportunities appear.

"These relationships will not immediately impact the tire dealer group if tire dealers remain fixed on delivering value to the end-user. Again, long-term value can and will keep them in the marketplace, and also deliver profits to them.

"One thing is for sure, new methods of delivering ‘value’ are needed to keep the truck makers away from the tire dealers’ market. Also, currently, we’re seeing more alliances than ever before. Tire dealers with OE service branches are aligning, leasing groups with servicing dealers are aligning, etc., so opportunities continue to exist."

It’s been preached time and time again – provide as much service and value as possible. That’s the only way to keep your foot in the door, because today truck manufacturers and fleets need tire dealers now more than ever.

"In our view, most vehicle manufacturer/dealer networks aren’t equipped or staffed to handle complete tire service work for their fleets," said Clark. "There may be opportunities for tire dealers to contract with an OEM dealer for certain on-site services if they desire. Fleets often use travel plazas for on-the-road tire replacement purchases (mount/dismount), but that business is based primarily on the location convenience of the travel plazas.

"The key here is that the commercial tire dealer must be both equipped and trained for the more complex services, such as scrap inspection, fleet inspection, retreading, and tire repair in order to provide the added value that many fleets are seeking today.

"Dealers who are trying to compete in today’s market must work continuously to improve the quality and depth of service and value-added information for fleet customers. In so doing, they’ll become an invaluable part of the fleet’s business."

That’s a very good piece of advice. The handling of fleets is a huge task and responsibility. But it can also lead to profits, added business and a level of prestige.

"Just be honest and deliver as promised," said Forsch about dealing with fleets and suppliers. "Don’t try to serve everyone, and focus on what is important to you. Determine what you do well and then do that – better than your competitors and better than the fleet can get otherwise. Ultimately, your customers will respect you and stay closer to you because of your honesty."

National Accounts
But is a dealer forced into setting up national account relationships to get the big bucks when it comes to commercial business? It shouldn’t have to be the only option, but sometimes it is – especially if the dealer is looking to sell tires from the Big 3 to some of the nation’s top fleets.

"Getting into national accounts isn’t necessary, but to do business with the top 200 fleets, and to sell them Michelin, Goodyear and Bridgestone/Firestone tires, most dealers are forced into national account business," said Knoper. "I don’t think service relationships impact a dealer’s ability to compete. The dealer who’s servicing the huge fleets is dependent on national account business.

"We’re not dependent on national accounts and will sell our tires to small fleets or operators, the construction industry and private delivery fleets. So our dealers aren’t dependent at all on national accounts."

Sometimes though, a solid national account can really help a dealer. "I believe national account relationships are important to the commercial dealer," said Goodyear’s Beasley. "Dealers also profit from those relationships with their customers that they foster in their marketplace."

"For a full-service mid-range to large commercial dealer, national account business is often part of the mix," said Michelin’s Clark. "The continuing consolidation of fleets will, in fact, increase this mix over time. If a commercial dealer wants to grow, they need to be flexible."

Emerging Opportunities
David Cullen is the executive editor of Fleet Owner. He deals with the truck OEMs everyday and has a firm grasp on the ins and outs of the commercial market from the fleet point-of-view. Tire Review asked for his thoughts on a range of topics that affect commercial tire dealers on a regular basis.

The biggest question is what kind of changes are taking place in the fleet/tire dealer relationship?

"The basic change that we see is that all the dealers – tire, engine dealers – are trying hard to pitch themselves to truck fleets as a sign that they can be the source for specing out and providing vehicle service and maintenance," Cullen said.

"What we see today is the fleet owns the truck and handles the most basic of maintenance issues. But then they farm out the rest of the work that needs to be done because they don’t always want to handle it."

So, the fleets are freely turning over more responsibility to dealers, right? "At the very least, the fleets are open to the idea of the tire dealers pitching for the business," he said. "They’re just not handing the business over, but the fleets are open to hearing the sales pitches."

While fleets farming out services happens all the time now, this is a big change over the thinking of the past and is still a relatively new idea. What caused the change?

"I think there are a number of reasons for these changes," Cullen said. "Higher labor costs are one, and it’s harder to find and keep good mechanics and technicians. That makes it easier for the fleets to be willing to outsource certain things, and the only disadvantage for the fleet is less control.

 

"However, technology improvements have helped to change that. Because of computers, a fleet can still get information and have a certain amount of control even when outsourcing. They can always log in to a server and see what the progress of a project is.

"Complying with environmental regulations is also hard for a fleet, which is why they’re inclined to let someone else handle that. And also, truck fleets are starting to be managed by people of a younger generation who are more comfortable with newer ideas and doing things in a different manner."

Staying With Technology
Technology has always helped advance the commercial truck industry just as much as any other. But sometimes, it moves too fast. Tire dealers have so much to worry about, it’s hard to keep track of the latest and greatest.

"Today, the main area for technological advancement is problem-solving for specific industries," said Forsch. "For instance, the waste industry is becoming more of a transportation industry and not a garbage collection business. Tires need to do different things for this sector than previously – such as meeting higher weight carrying limits on front axles. If you solve that problem for this sector, you should have a good position within the industry.

"Another area of change is with line-haul carriers. The challenges there are fuel costs and irregular wear on steer tires. If you can address those concerns by saving fuel and delivering an even wearing tire, you’ve got a good chance of participating in that marketplace."

Reducing rolling resistance and finding ways to lighten the tire/wheel assemblies is also critical for fleets. Better moving, lighter trucks translate into more payload transported, at greater profits and with less money spent on tire replacement.

"There is a definite trend towards reducing the weight of the tire, which will reduce the unsprung weight on the vehicle. That results in less rolling resistance and better fuel mileage," said Toyo’s Knoper.

"Cradle-to-grave" tire systems have become wildly popular. It’s a system that a fleet can really understand and usually one that makes sense for them. How heavily are fleets embracing these systems that tire companies – especially those that offer a retreading program – espouse?

"If I were running a fleet operation, I’d be interested in the cradle-to-grave concept," Cullen said. "It’s something being adopted in large fleets because they can quickly track what they’re saving. For the smaller fleet, it’s probably a tougher sell but still something for them to look into."

"Smart tires could be on the horizon, but only if all users and manufacturers can adopt a common system. Barcodes or computer chips could be installed so people can keep track of tire wear. But everybody is going to have to be on the same page of the same book."

 

Another way to reduce the weight on the tire/wheel assembly is to eliminate tires. It sounds like something that should have been done a long time ago, but removing half of a set of duals is a bit of a technological challenge.

Michelin took the first step by creating a 50-series and below single truck tire – the X-One. Bridgestone/Firestone and others are gearing up their versions.

"Incorporating a completely new belt technology (InfiniCoil), the X-One can reduce vehicle weight and save fuel compared to various dual tires on the market," said Clark. "With the X-One (launched in November 2000), we’re convinced this tire will play a significant role in the future development of long-haul trucking."

In The Future
Questions about the future of the commercial market abound. The economy has to improve. New trucks sales need to stabilize. Used vehicle stocks need to be depleted. From there, it’s wait and see.

One thing is for certain, the immediate future isn’t bleak, but it’s far from rosy.

"I think that what we’re going to see isn’t an across-the-board impact, but the Class 7 and 8 trucks will take the longest to rebound in sales and that’s because there are so many out there," he said. "The market will really have to take off to get rid of the surplus before anything else can happen."

Now the waiting begins.

Trucking’s Downturn Seen In Record Bankruptcy Filings


The trucking industry has again proved an accurate bellwether for state of the U.S. economy. Based on what’s been happening in the trucking industry over the last year, the familiar adage, "As the trucking industry goes, so goes the economy," has never been truer. And the impact of trucking’s downturn on the tire industry will continue to be felt for some time. 

In the third quarter of 2000 alone, over 1,300 truck fleets of five or more power units shut down, driven out of business by high diesel fuel and wage costs that were not compensated for by increased freight rates. The second quarter saw nearly 750 trucking fleet bankruptcies, a record for the quarter. The first quarter saw only around 300 fleets go out of business. Fourth quarter figures are not yet available, but could reach 1,000 fleets, according to industry observers.

Meanwhile, diesel fuel prices have climbed dramatically since the beginning of 1999, reaching a five-year record of $1.52 per gallon in the third quarter of 2000 – some $0.25 higher than the previous $1.27/gallon record in 1996.

Freight volume growth reached an annual rate of 6.5% by mid-2000, but dropped to just above 3% by the fall, a decrease aided by increasing fuel and utility costs that curtailed retail sales in the last half of the year.

Shipments of medium truck tires have also suffered. OE medium truck tire shipments totaled 5.59 million units for 2000, down from 6.86 million tires for 1999, according to data from the Rubber Manufacturers Association (RMA). Replacement tire shipments for 2000 reached 15.01 million units, up slightly from 1999’s 14.66 million tires for the same period. However, replacement shipments in the October-December period were down markedly vs. the same months in 1999.

Sales of new Class 8 tractors set a blistering pace in 1998, finishing at 209,483 units for the year, up over 30,000 units from 1997. The market exploded in 1999, hitting an all time record of 262,316 units for the year. However, after a strong first quarter, 2000 sales went south – in a hurry. Though final figures for 2000 have not been posted, it appears that sales of new Class 8 tractors will drop nearly 60,000 units compared to 1999.

Now the good news: Economist specializing in the trucking industry see improvements on the near-term horizon. After a slow first quarter, most predict a return to strong 3%-4% gross domestic product growth by the end of this year. After the stock market crash-and-burn Wall Street saw in March, let’s hope they’re right.

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