The private brand tire segment underwent a tumultuous 2009 as a result of the global economic downturn that affected all aspects of the tire industry, as well as the Obama Administration’s placement of heavy additional duties on passenger tires imported from China.
Nearly 12 months after the three-year additional tariff on China-made tires kicked in on Sept. 26, 2009, private branders are still adjusting. In a segment that had already seen its marketshare decreasing – according to RMA figures, private brands held a 22.1% share of the P-metric segment and a 21.8% share of the LT-metric side in 2004, compared to 10% and 11%, respectively, in 2009 – what does the future hold for private brands in North America?
According to private branders Hercules Tire & Rubber Co. and Del-Nat Tire Corp., there is still a place for private brand tires, especially now that consumers are more cost-conscious after the tough economic times of the last two years.
“There’s still a market for private brands here,” says Del-Nat President Jim Mayfield. “People still need product that offers value and good quality.”
Looking Back
Chinese manufacturers stepped into the U.S. private brand market to fill a void created by lack of interest from domestic tiremakers. Overseas suppliers found their way into the U.S. market as once active contract producers – including Goodyear, Michelin, Continental and Bridgestone – trimmed private brand production in order to free capacity for their high margin/high value flag lines. Only Cooper remains active as a domestic resource.
The last few years have seen many overseas suppliers making extensive investments in plants and equipment, resulting in tires that offer quality, design technology and operational efficiencies that are on par with domestic manufacturing facilities.
The tariff, which started at 35% for the first year and will scale down to 30% the second year and 25% in the third, was lighter than the International Trade Commission’s recommended 55%/45%/35% scheme, but high enough to please the United Steelworkers, which brought the anti-dumping complaint back in April 2009.
The ITC itself could not agree completely on the complaint or proposed remedy, issuing a rare 4-2 ruling calling for a tiered tariff system. The two dissenting ITC members said such tariffs were unwarranted as tiremakers were unlikely to build new plants or add production and jobs to address the lower price end of the market, and that tire plant job losses were not the result of rising importation from China, but rather the cause.
The USW’s original Section 421 complaint called for a quota system that would have limited the number of passenger tires that could be imported from China. The labor union claimed that rising imports from China had caused the loss of some 5,000 tire plant jobs in recent years.
The heavy tariff, the USW thought, would surely bring production jobs back to the U.S. To date, though, not a single brick has been laid or worker hired in the U.S. to increase production of low-end tires. Instead, China maintained most of the business, albeit at higher prices.
While the USW hailed the tariff decision, several U.S. tire companies countered that the action would harm, not help, U.S. consumers. Rising prices would be sure to follow, adding further financial burden to an already cash-strapped public, argued the U.S. Coalition for Free Trade in Tires, a group made up of Del-Nat, Hercules, American Omni Trading Co., Dunlap & Kyle Co., Orteck Global Supply & Distribution Co. and Foreign Tire Sales Inc.
And sure enough, that is what occurred, according to Del-Nat’s Mayfield. “Chinese manufacturers have had to raise their prices substantially,” he says. “We’ve seen multiple price increases out of China since the tariff went into effect.”
He noted that while a large portion of those increases is due to the tariff, raw material increases have also come into play.
“The biggest impact Hercules has seen is volatility in the market as a whole, and increased prices to the end consumer,” says Joshua Simpson, vice president of marketing for Hercules.
Other Impacts
Both companies have continued to source product from Chinese manufacturers but are still adapting to the changes that were a result of the tariff.
“The biggest impact has been the disruption to the supply chain,” says Del-Nat’s Mayfield. “Since U.S. distributors were not ordering tires for a period last year, Chinese manufacturers started selling tires to Europe and other countries. When we decided to start buying again, we had lost our place in line and had to get back in line. The pipeline certainly dried up; it’s getting full again, but it’s taken some time to do that.
“We did seek other sources in addition to China, but there was not a lot of available capacity in the global market ready to start shipping to the U.S.,” he continues. “It did create challenges in the supply chain at the beginning of this year.”
Mayfield notes that while the supply of tires from China to the U.S. will continue, the internal consumption of tires in China is growing considerably. “While China will still be a substantial supplier to the U.S. market, it will be supplying a growing number of tires to the global market and its own internal market. The Chinese are going to be consuming much more of the product that they’re building. Also, China is selling more tires to other parts of the world, which I think will continue.”
Because tiremakers in countries other than China generally don’t produce tires that meet the sizes or applications needed in the U.S., there have not been substantial increases in imports from manufacturers in India, Europe or other Asian countries.
“They’re not making major investments in order to do that, knowing that the tariff is going to go away in just over two years now,” Mayfield says. “There has not been huge investment anywhere in the world – including in the U.S. – to supply tires to the U.S. market because of this tariff.”
Fast Forward
In roughly two years when the tariff ends, Hercules’ Simpson foresees “another period of overall market volatility regarding products and pricing.”
On a related note, Del-Nat’s Mayfield predicts a permanent shift in price point that will have a lasting effect.
“I don’t anticipate that on Sept. 26, 2012, there will be a 25% drop in the price of tires out of China,” he says. “The Chinese are going to continue to sell tires here, but they won’t be selling at the same price level they were prior to the tariff. Chinese manufacturers will discover in this process that they’re able to sell tires at a higher price. I think it will be closer in price to some of the second- and third-tier brands that currently exist, and they’ll compete in the market the same way everyone else does.”
Each tiremaker agrees private brands will still fill a needed role in the U.S. marketplace well into the future, both from a dealer and consumer standpoint.
“Private brands will continue to fill a need as a profitable alternative to consumer brands within the dealer network in the U.S. marketplace,” Simpson says. “Hercules continues to partner with strategic manufacturers, working with them to develop new, quality products while honoring all commitments we have made to our partners.
“Hercules offers two things to the independent tire dealer: a quality tire addressing the value segment and a brand our dealers can call their own, one that’s protected by territory exclusivity,” he continues.
Del-Nat also offers tire dealers the opportunity to maximize profits by having exclusive rights in their territory to market their brands, either Delta or National, Mayfield notes. “It allows dealers to have a product that they’re not competing on price with everyone else in their market.
“The private brand market is going to be here,” he says. “There are manufacturers that value the private brand business and what it brings. We create volume for them that doesn’t compete with their own brands so we can help fill up their capacity. For the private brand folks who distribute their own product and have strong customer relationships, there’s going to be a good future for us.”
