June 4, 2007 – A raw deal on tire prices, sales

By Steve Bauer
Managing Editor
With oil prices hovering near $65 a barrel in recent weeks, it’s not hard to see the immediate effects the precious fossil fuel is having on the world economy. Gas prices are soaring to new records in the United States, rising transportation costs are causing some companies such as Wal-Mart and Home Depot to cut back shipments to stores and mass transit ridership in the U.S. has risen nearly 60 percent in the past month alone.
One industry that feels the pain of rising oil prices are tire manufacturers, which use refined oil to make their products. For years the industry has managed to absorb most of the costs associated with oil jumps, but with other raw material costs also rising, manufacturers can no longer turn a profit without passing on manufacturing costs to distributors, dealers and ultimately consumers.
As a result, expect more tire price increases in the near future.

Transportation troubles
Bridgestone Manager Bob Graham says that although the recent jumps in oil prices hasn’t helped matters any, it’s actually the increasing costs of transportation and raw materials, such as steel, nylon and chemicals, that’s making it very difficult for tire manufacturers to operate at a profit.
“The effects this has had on us is horrendous,” he said. “Obviously we have to stay in business. And it’s not just a Bridgestone issue, any tire manufacturer has the same scenario. So we’re looking at price increases wherever we can because we have to pass those additional expenditures onto somebody because we have to show a profit to stay in business.”
Graham says that of the biggest expenses he’s seen is the cost to transport tires both from manufacturing plants overseas, but also to distribute them in the U.S.
“My tires are all manufactured in Japan, and they’re all warehoused in Southern California because that’s the point of entry,” he said. “Now I’ve got to ship to my distributors in New York, Pennsylvania, Florida, North Carolina, Michigan and the Canadian provinces. Obviously running all that product with the fuel surcharges coming from the freight companies, that has become a major increased expense. In my opinion, spikes in oil prices hurt us the most, because we use it to not only manufacture tires, but it also rears its head in transportation costs. Don’t forget that even the raw materials we purchase have to be transported to one place to be processed, and then transported again. My freight bill is roughly 20 percent more than it was last year.”
Scott Griffin, national sales manager for Maxxis, agrees that transportation costs have been the main culprit for price hikes of late.
“The transportation costs are crazy,” he said. “There are surcharges on containers for bringing the tires to the U.S., trucker gasoline surcharges for delivering them to our warehouse, etc. So it’s not just raw materials it’s the whole gamut. Everything’s more expensive.”
Cutting costs at the factory
Griffin says one thing his company is trying to do is reduce production costs, which will hopefully prevent another price increase.
“We have had two price increases in six months. We had one last July, and we had one at the beginning of this year. There’s discussion of another possible increase, but what we’re trying to do instead is engineer production costs down,” Griffin said. “We’re trying to take the weight out of the tires, because when you do that you reduce the rubber content of the nylon. But the end result is a tire that still meets performance standards. So we’re working on that, and we’re also trying to streamline some of our efforts at the factory, as far as buying our raw materials and making sure we’re getting top dollar for the quality grade that we require. But mainly we’re on a major focus right now to take manufacturing costs out.”

Any impact on dealers?
Although many in the industry believe the increase in tire prices is having a negative affect on both the dealer and consumer, manufacturers say dealers will pass any increased costs onto the consumer, and so far this year sales have been increasing.
“I don’t think it affects the dealer at all because he buys the tire from the distributor at whatever price it is, and he marks it up 25-30 percent to cover his costs,” Graham said. “They’re not absorbing the extra costs; it’s the end consumer who’s absorbing it, and right now based on the numbers we’re seeing that doesn’t seem to be having much of an effect on them, either.”
Griffin says often dealers will never even see the cost increase because it will be absorbed by the distributor. But even if the costs do get passed down it has little impact on a dealer.
“When we raise prices to our distributors, sometimes they will absorb it and other times they’ll pass it along as well,” Griffin said. “It depends on how sales are going. By the time our dealers get them, sometimes they will say that our prices are going up, but in general all tire prices are going up, so it doesn’t penalize us as much. If we were the only ones raising our prices, it would be very difficult for us. It would stymie our sales growth. But during these price increases, we continue to see sales increases, so I don’t see any effect on dealers from our perspective.”

More troubles ahead
Although it’s difficult to forecast what direction oil and other raw material prices will go in the coming months and years, the general consensus in the tire industry is that unless consumer demand suddenly subsides, tire prices will continue to rise.
“From what we can determine, yes, things are going to get worse before they get better,” Griffin said. “We don’t see any letdown anytime soon. The price of oil has been fairly high recently, and it’ll continue to remain high. Oil reserves are being depleted and it’s just going to get worse, and demand for raw materials is higher than ever because we’re producing more tires than ever before globally.”
Graham agrees, and says all tire manufacturers will continue to increase prices to ensure they stay in business.
“Last year I believe in the industry we averaged a 10 percent increase in tires prices, and I don’t see a way prices won’t continue to rise as long as our costs remain so high,” he said. “Part of my job is to make a profit for the corporation. So I can’t bring all these tires in and sell them at a loss. For us to stay in business we have to turn a profit, and when appropriate, we’re just going to have to pass those costs on. The only thing I can tell you about the future is that we’ll do what we need to so we remain profitable.”