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Smarter Perspectives: Automotive

Podcast: Tire Market Rolling With the Changes

Guest Greg Baldor, Steve Katz (host)

This podcast features a discussion with Greg Baldor of Hilco Valuation Services about the changing tire industry including the impact of reduced production output, increased raw material pricing, shipping delays and higher import costs.

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Steve Katz:

Hi everybody and thanks for taking time out of your busy schedule to listen in on the Hilco Global Smarter Perspective Podcasts. As return listeners know by now, I'm your host, Steve Katz. And if this is your first time with us, well, then welcome. We are really glad that you could tune in today. Our discussion today is centered around the changing tire industry and how the impacts of tariffs that were imposed prior to the pandemic and a big drop in the number of miles that were driven during the height of the COVID period back in 2020, have now been even more intensified by reduced production output, things like increased raw material pricing, shipping delays, and higher import costs as well. And to talk about all of that, our guest today is from Hilco valuation services and it's Greg Baldor. So Greg, first time on the podcast. Welcome

Greg Baldor:

Steve, thanks a lot for having me on your show. Happy to be here. I think we could probably even subtitle this discussion The tires, they are changing.

Steve Katz:

I like that one. That's good, but just don't ask me to sing it.

Greg Baldor:

In this discussion today, I'm primarily talking about passenger and light truck tires, the main market for tires, passenger cars, pickup trucks, SUVs, et cetera. And not that long ago, U.S. car owners, they might have had two cars, let's say the family Pontiac, and then a second vehicle, a Saturn, and tires would wear out. And they would go to, perhaps at that time, it's one of the 900-plus Sears Auto Centers to get a replacement set of tires for their vehicle. And as they walked in, they would be offered typically three types of tires. And Pontiac, they would probably suggest a Tier 1 tire. And with a Tier 1 tire, it's an OEM brand or the original equipment manufacturer's brand where the manufacturer has selected this tire. And it's from companies, Goodyear, Michelin, Bridgestone, well-known, probably the best engineered, lasting long in tires, et cetera, good looking tires.

Greg Baldor:

And generally the higher price, so typically suggested for sort of the main vehicle. The second vehicle, maybe they would offer the Saturn, they call it Tier 2 brand. And these were brands also made by the major manufacturers that didn't have as many marketing dollars and perhaps were engineered a little differently and were a little bit lower cost. So a Goodyear Kelly, a Cooper tire, something like along those brands. And then there were Tier 3 tires. These were typically store brands. In the same mode, these were brands with minimum marking from the manufacturer, but made to a standard agreed to between the retailer and the manufacturer. So Tier 1, Tier 2, Tier 3, and it was pretty clear what you were getting into. And these anchor brands, Bridgestone, Michelin, Continental, Goodyear, they had the greatest market share in North America, the highest prices. And they were the best in the good, better, best selling strategy that was utilized somewhat across the industry.

Steve Katz:

Yeah. So, Sears Auto Centers are long gone now, right? You mentioned Saturn, GM Pontiac brands are all defunct. And that tiered structures changed to some degree, right?

Greg Baldor:

Yes. And a lot of that has to do with a number of changes within the industry, in that more players have come into it, more competitors from Europe and Asia, et cetera. And we will get into that as we go through here. But main discussion here today is going to be on the replacement tires. So, these exact tires that we're talking about, we're not talking about the original equipment tires, but the largest segment of the market is replacement tires. And so, the good news for those involved in that market is IHS Markit is a firm that monitors various industries. They've been following that the average age of vehicles in the U.S. top 12 years for the first time in history. So in 2021, the average age of a vehicle on the U.S. highways was 12.1 years. And it's been slowly increasing. I think some recent stats just came out and that also continued that trend.

Greg Baldor:

So, the older the vehicles you have, that means most likely that the tires on them have been driven more miles. And that means that they will be requiring replacement for either wear, puncture, what have you. And that's a growing trend of opportunities for the replacement market. So in that market, especially in the U.S., it's incredibly crowded. As I said, a huge influx of Asian manufacturers has been producing. They've been bringing more products into the U.S. Some of them are fighting for that OEM business. Recently I drove a Volkswagen Passat. It had a GT tire, both the tire and the car made in the U.S. That's an OEM tire today that wouldn't have necessarily existed in the past. And certainly, you've heard of brands like Kumho and Hankook, Korean brands that have come across on some of the Kias and Huyndai and vehicles like that.

Greg Baldor:

So, it gets blended in this mix of those tires may have been coming into the U.S. at a point and been considered second tier and now it's sort of muddled within that. As the competition has increased, there's been a tremendous of other issues, I guess like I think you mentioned starting with COVID impact prior to 2000, we all are aware of Section 301, I call them the Trump tariffs, which ended up being 25% tariff beginning in May of 2019 on a tremendous amount of goods imported in the U.S. from China. Included in that mix were tires, rubber, components to make tires in the U.S., and other rubber chemicals. So, they all were pressuring the manufacturers in the U.S. in terms of costing. And as they fell into this or just kind of digesting 2019, COVID-19 pandemic hit, and a number of plants shut down in March, April, and May of 2020, both in the U.S. and abroad. And in the U.S., passenger tires had the lowest production level since 1955.

Greg Baldor:

So, it was quite an impact. And then of course, into 2021, the car manufacturers had a tremendous amount of issues, which are ongoing today, including a lack of computer chips and even a lot of their sub-suppliers had factory shutdowns, et cetera. And during this time, of course, the price of oil is going up. One manufacturer stated that two-thirds of the costs of a tire are influenced by oil prices. So, prices, costs are going up. You add to that the port congestion, the shipping delays, or all the other factors that have been widely publicized of the pandemic's impact on global shipping. And there were a number of companies that who were reporting that a container of either tires or raw materials may have gone up 10 or $20,000 more landed than it was not that long ago.

Steve Katz:

Okay, interesting. So, you've got significant increase in the container costs, the crude price is increasing, and then there have been other price increases as well by manufacturers. Can you talk a little bit about that? And then we'll get into some of the distributor issues.

Greg Baldor:

Absolutely. Michelin North America, one of the brand leaders in the worldwide industry, and in April of this year, they announced their sixth price increase in a little over a year and they cited market dynamics as the rationale. So, the competition from manufacturers and importers, they all had to raise prices and so they've continued to trend upward. So, Michelin North America is part of the U.S. Tire Manufacturer's Association or U.S. TMA. It's a trade association of trade manufacturers in the U.S. They operate these 13 companies, 57 tire-related manufacturing facilities within 17 states. And they generated more than 27 billion in annual sales. The association reported that shipments of tires in 2021 were a little over 335 million units, which beat the prior year forecast by almost 20 million units. Of course, if taken into consideration, they were looking back at historically low rates in 2020.

Greg Baldor:

Projections for 2022 are that passenger tires would increase about 1% and that's the largest component at about 227 million units. And that light truck tires would decrease slightly to 38.5 million units. So, we have some changes going on there. And within that, probably one of the bigger manufacturing events that happened last year was Goodyear Tire completed the acquisition of Cooper Tire & Rubber Company. And they were two of the leading U.S. manufacturers. At the time of the acquisition, Cooper was the fifth largest tire manufacturer in North America. They had 13 operating plants in 15 countries and they produced two and a half billion annual sales of replacement tires. You combine them and they reported 17.5 billion. So, as things are shifting, we now have one of the leading OEM brands buying one of the leading formerly known as Tier 2 replacement tire companies. And it is shifting some of the dynamics within the industry.

Steve Katz:

Yeah. And very interesting. Obviously, the tariffs and duties I mentioned at the top of the podcast that were imposed back before COVID, that you also touched on, haven't helped all those costs either. So, let's move on to the distributors then. Can you give us a couple examples, if you would, of steps that have been taken on behalf of the distributors on the distribution side before and since the pandemic to address the ongoing challenges they're being faced there?

Greg Baldor:

Absolutely. I do want to add a subset to the discussion on tariffs, in that for several years now, the U.S. Department of Commerce has added two types of duties to imported tires. It started and targeted China and then went into other areas. And these are in addition to any Section 301 duties. So, these were countervailing duties, which the government calculated were unfair government subsidies by various countries, as well as anti-dumping duties, which were essentially the government decided or calculated that certain manufacturers were selling below costs. So, when you get into the distribution side of things, which includes obviously domestic manufacturing, you have these imports coming in and they're coming in at higher prices. So, the manufacturers are trying to maneuver things as best they can. And quite surprisingly to many of us, in 2018 before the pandemic, Goodyear and Bridgestone, that's the number two and number three tire producers in North America formed a joint venture called TireHub.

Greg Baldor:

And this TireHub is the leading distributor now for the Goodyear and Bridgestone brands. Formerly, those brands were being sold through a number of distributors, including the largest U.S. tire distributor, American Tire Distributors. And they removed those two brands from ATD and formed this TireHub, so now there's a new distribution arm of quite significance going out there to compete with other competitors. As we proceed through the pandemic, one of the largest independent tire wholesalers in the country, U.S. AutoForce acquired Treadmaxx Tire Distributors in October 2001, and then later Max Finkelstein Inc January 2020. So, just recently. AutoForce was already a presence in various parts of the country, but this strategically added 14 Treadmaxx distribution centers in the South and Southeast, 13 Max Finkelstein distribution centers in the East and Northeast. And so again, it's consolidating and creating larger competitors within the marketplace.

Steve Katz:

Yeah, that definitely seems to be the trend. And what about the retailers?

Greg Baldor:

So, you always have to go back to the pandemic impact. Initially, we had a reduction in workforce, so doors perhaps were closed or reduced service centers and traffic. People working from home, the vehicle levels of miles driven, decreased. And less miles driven, you have less wear on the tires and most likely reduction in the need for replacement tires. So, the U.S. Department of Transportation calculates cumulative travel on roads on a monthly basis. And from the timeframe of August 2020 versus August 2019, mileage decreased by 15%, which is quite significant. And installers in the tire industry were deemed essential service, so they were allowed to operate, et cetera, but again, under reduced efforts. Now, the recent U.S. Department of Transportation data indicates that cumulative travel increased for all of 2021 versus 2020.

Greg Baldor:

And these numbers are amazing. They increased by 325 billion vehicle miles or an 11% increase. And most recently, even January of 2022 increased 4% over January of 2021 as Americans return to work into the highways and traveling, et cetera. Within the retail side, there's also been a series of consolidations. I think one of the interesting ones is Percheron Capital entered the industry in April of 2021, and they acquired 20 Big Brand Tire and Service locations in California. And then under the Big Brand umbrella, they subsequently made acquisitions in the fourth quarter of 2021, a number of chains on the U.S. West Coast and added well over another 125 outlets. So again, a growing retail presence, just from one player that formally didn't even exist, then you have a very large player, which is Reinalt-Thomas Corporation.

Greg Baldor:

Most people know them, the DBA, as Discount Tire Company. They're a leading retailer, and operate 1100 stores across 36 states. In the end of 2021, they acquired Tire Rack, which is the largest direct-to-consumer online retailer in the U.S. And they have 11 distribution centers just for Tire Rack, and it's almost 3 million feet of tire warehousing capability. These are examples within the retail marketplace where consolidation continues to exist and retailers are forming much larger change within the marketplace.

Steve Katz:

Okay. Well, definitely a lot of activity. As you said, the tires, they are changing. And I will not sing it. So to wrap us up, because I'm looking at my watch and we're just about out of time, given everything we've talked about today, the tariffs, shipping delays, price increases based on raw material costs, et cetera, are there any final thoughts or guidance that you'd like to share with listeners who are either involved in the space directly or within a lending capacity?

Greg Baldor:

So, given the current environment, lenders' exposure within the tire industry includes changes in inventory levels, product mix and aging. One point I didn't mention is that there are a growing number of tire sizes for passenger cars ranging from 12 to 28-inch wheels or rims, and that's according to the Tire and Rim Association. And for passenger tires, there's 373 different sizes within that range. And with light truck tires, 291 different wheel sizes. You also have a plethora of brands to be offered, so there's a wide range of offerings out there. And the most popular sizes, the most popular brands may have exited the warehouses. And it's perhaps the product that's behind, maybe slower-moving product, might be older-aged product that doesn't sell as well. So, the lender must be aware that the inventory that they're advancing against is not a disproportionate inventory of less desirable, slower-moving product.

Steve Katz:

Okay. Well, good stuff, Greg. Thanks so much for being on with us, and we hope that we can have you on again when you think the time is right to talk about things as they develop. And can you let us know how people can best get in touch with you?

Greg Baldor:

Absolutely, Steve, as it was a pleasure to be on. There's a lot to talk about in the industry. My email address is gbaldor@hilcoglobal.com. That's G, B as in boy, A-L, D as in dog, O-R@hilcoglobal.com.

Steve Katz:

All right. Well, thanks again. And listeners, keep an eye in that combination of inventory levels, product mix, and aging. And don't hesitate to reach out to Greg for a very qualified perspective on your, or your borrowers, specific situation. And as always, we hope that this Hilco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward as well. Until next time, for Hilco Global, I'm Steve Katz.

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