Tyre makers no longer victims of OE demands

ERJ staff report (TB)

By Bruce Meyer, Crain News Service

Akron, Ohio -- The business of supplying original equipment tyres has changed drastically in recent years.

No longer is it a given that tyre manufacturers expect to lose money on the tyres they deliver to auto manufacturers.

Nor do the tyre firms automatically jump-to the potential detriment of their replacement tyre businesses-whenever their car company customers say they need more tyres and they need them now.

An example of the paradigm shift that has occurred in the North American OE tyre market for passenger and light truck vehicles is how some of the tyre makers are responding to the higher-than-expected jump in vehicle production for 2011.

The most recent forecast by the Rubber Manufacturers Association calls for OE passenger tyre shipments to rise by nearly 12 percent to 36.9 million units this year, after growing 35 percent in 2010 as domestic auto production ramped up from the near historic lows in 2009.

The OE market for light truck tyres for 2011 is projected to stay constant at 3.6 million tyres, after increasing 29.6 percent last year.

As some of the car manufacturers are reporting shortages in tyre sizes-Chrysler Group L.L.C., for example, said certain tyre sizes for minivans are in scarce supply-the answer isn't always what the auto customers would like to hear.

While the tyre makers said they are meeting their contractual obligations for OE tyres, if the customers request more, the answer often is, “It depends.”

Running at full bore

“We absolutely are meeting our contractual demand component,” said Mike Martini, president of Bridgestone Americas Tire Operations' OE tyre sales for the US and Canada Consumer Tire Sales Division. “We saw this coming. We didn't overcommit and so the issue isn't-at least from our perspective-on our side.”

Bridgestone as a rule plans to run its tyre factories at virtually 100 percent of capacity, so normally it's not in a position to take on additional volume.

“There've been opportunities presented to us and we've said, 'Thank you very much,' but in order to keep a good balance between replacement and OE, we won't throw away the other side of the balance just to make them happen,” Martini said. “If it makes sense, then we might do it, but to be honest with you, there have not been very many instances where we've been able to say, 'That makes sense for us.' ”

The car companies know Bridgestone will live up to its commitments and will continue to ask for help, he said, but they likely know upfront that the tyre maker won't be in a position to help. “There may be a few cases where if the volume isn't much, we'll try to help them out. But it's not wholesale changes and the kind of volumes they're looking at.”

Michelin North America Inc. is following a similar tack and also running its North American plants at full capacity, but it has been able to meet some requests to supply additional OE tyres, according to Rob Murray, the firm's vice president of operations for OE.

“We see rising vehicle production as a very positive sign for the industry, and while the growth came quicker than anyone could have predicted, we are reacting positively,” he said.

“It's clear that vehicle sales are rising and therefore OE tyre demand is outstripping all projections. As a result, we have been working with our OEM customers since the fourth quarter of last year to actively manage demand.”

Michelin is communicating closely with the auto makers and providing them with as many tyres as possible, but the firm also keeps its replacement tyre customers in mind, Murray said. “We are balancing our commitments at OE and replacement to best meet the needs of the market.”

While meeting all contractual obligations to its automotive customers, Michelin did have the foresight to increase flexibility so it could deliver specific tyres that are in high demand.

“Remember, one year ago the industry was predicting a slow and painful recovery,” the Michelin executive said. “Now the industry is in a full upswing and many suppliers in a variety of industries are adapting to keep up.… We are working one-on-one with our OEM partners to identify opportunities to deliver additional capacity above our commitments whenever possible, mindful of our replacement market commitments and capacity limitations.”

Evolving relationships

The way tyre makers are dealing with these shortages is just one way the OEM relationship has shifted over the years.

“One of the paradigm changes is the OE business has to be profitable,” said Martini, a veteran of 25 years in the OE business.

So no longer is an assumption made that if a tyre maker's sales mix shifts more toward OEM and away from the aftermarket, that the change has to be an unprofitable one, he said. “We've got to make money in both areas.”

Two things in particular have driven this change, Martini said: the escalating prices of raw materials that required the whole industry to make a change, and the millions of units of annual capacity that tyre makers have taken out of North America.

Murray said Michelin's OE contracts have to make good business sense.

“We look for long-term partnerships that provide our OEM customers the advantages and enhancements they need,” he said. “In this regard, we have proven value to the customer over the years.”

The tyre maker, in fact, prides itself on its OE record, saying that it enjoys one of the highest OE loyalty rates in the industry and has collected more J.D. Power & Associates Awards for OE customer satisfaction than all its competitors combined, Murray said.

In fact, Michelin just swept the top ranking in all four categories-luxury, passenger car, performance sport and truck/utility-when the 2011 awards were announced April 11.

“Michelin positions itself as a solution provider for the OEMs,” he said. “Our technical expertise has allowed us to be that go-to company for innovative solutions.”

Hankook Tire America Corp. is one of the smaller players in the North American OE tyre market, but its share has grown in recent years, and it sees the value in a stronger OE presence. “OE fitments remain a very valuable way to connect to new customers and establish the quality of your brand in their minds,” the firm said.

Martini said communication between tyre and car makers is at a level he's never seen in his career. “We're really in lock step with them,” he said. “Our team is with them every single day. That's how you develop the appropriate technology.”

What car makers want

It's also refreshing that the top thing the auto makers are looking for from their tyre suppliers no longer starts and ends with price, according to Martini.

The upcoming corporate average fuel economy (CAFE) regulation changes have a lot to do with that because of the key role tyres can play in raising gas mileage by providing lower rolling resistance.

“We can provide excellent low rolling resistance while maintaining all the other performance characteristics that the OEMs and everyday drivers value,” Murray said. “That's what makes our tyres the key contributors in the race to meet regulatory requirements as well as consumer needs.”

Hankook said that while rolling resistance will be one area of focus, there will be other effects of the new CAFE standards to consider, including tyre weight and a general reduction in cross-section size to mitigate wind resistance.

Martini said besides giving the appropriate balance of fuel economy, noise-vibration-harshness properties and traction, Bridgestone has been stressing the need to add tyre wear to the list because that is something the end user cares about more than anything.

“We've had to educate a number of our customers in that regard,” he said, “and I would be the first to advise that I am very pleased that they've made some significant changes in where they've headed in that area.”

Of course, the financial rebound of the car makers helps when it comes to taking the focus off costs, the Bridgestone executive said. “One of the good things when the auto companies are making money is that it takes some pressure, if you will, off of the price side, and maybe you can look at what the end user wants and have a solution that is product-oriented.

“And that's their business and that really needs to be our business: What are the best products that provide a solution and value to the end user?” Martini said.

From Tire Business (A Crain publication)