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“With unemployment around 10% — and there being no signs of it getting much better anytime soon — the recovery is fragile, in my opinion.”

Always looking ahead

Saul Ludwig knows the tire industry as well as anybody. He thinks we will need more tires and more jobs in 2011

By Bob Ulrich

We fi rst asked analyst Saul Ludwig to predict the future of the tire industry in our January 1973 “Facts Issue.” At the time, many independent tire dealers and investors were concerned about the growth of radial tires, and the proliferation of sizes.

Th ey also were confused about what was happening in their industry. Th e federal government was implementing business-altering legislation. States were wrestling with minimum tread-depth laws. And tires were being imported at record levels.

Ludwig was optimistic despite the uncertainty.

“When changes occur in an industry, two things happen,” he said. “First, those who view the change as an opportunity usually come out stronger; and secondly, those who view change with apprehension and uncertainty usually come out as losers.”

Th irty-eight years later, the issues haven’t changed that much. Neither has Ludwig.

Although he left KeyBanc Capital Markets in April to work for Northcoast Research Holdings LLC, he’s still a managing director, still based in Cleveland, Ohio — and still the top analyst in the business.

Ludwig admits he wasn’t optimistic enough last January, when he predicted 2010 domestic replacement and original equipment consumer tire shipments would increase 2.6% and 10%, respectively, compared to 2009.

The final numbers finished closer to 6% and 34%, as demand greatly outpaced supply through the fi rst half of the year.

“Who would have guessed that U.S. auto and light truck sales would have increased 14% in 2010?” he says.

MTD: Are the eff ects of the recession over for tire manufacturers? Tire dealers?

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Ludwig: No — for both manufacturers and dealers. Total tire unit shipments in 2010 are estimated to have been 284 million, but that would still be 8% below the former peak of 310 million shipped in 2007.

On the other hand, a recovery is clearly underway, as evidenced by the recent sharp recovery in truck tires. I also think the new tax bill will be a positive.

Th e key, however, will be unemployment. With unemployment around 10% — and there being no signs of it gett ing much bett er anytime soon — the recovery is fragile, in my opinion.

MTD:We estimate that Chinese consumer tire imports to the U.S. will be down

Defi ning moments in 2010

Modern Tire Dealer asked Saul Ludwig, a managing director with Northcoast Research Holdings LLC, what the defi ning moments in the tire industry were in 2010. Here are his answers.

1. “Leadership changes at any large company is always important because you never know if the new person will make substantial changes. So the retirement of Bob Keegan and the appointment of Rich Kramer to CEO at Goodyear and the change from Mark Emkes to Gary Garfi eld at Bridgestone Americas were important events.” 2. “The surge in raw material costs, including a near doubling of natural rubber prices, was surprising. The demand for natural rubber was up 12%, while natural rubber production may have increased just up to 6%. This necessitated three rounds of price increases by tire manufacturers, putting added pressure on consumers. “ 3. “There also was a surge in announcements for new tire plants, to be built in China, Indonesia, India, Mexico and Brazil. By 2015, these plants could add approximately 340 million tires to today’s global capacity of about 1.4 billion tires. Even in the U.S. there have been some modest expansions announced.” 4. Cooper turnaround. “Cooper Tire lost $220 million in 2008; in 2010, it might have had record earnings. This was a remarkable transformation. Cooper benefi tted from capacity rationalization, plant effi ciencies and the tariffs.” 5. The restructuring of Pirelli. “Pirelli shed virtually all of its non-tire operations to become a pure tire company, and outlined an aggressive global expansion program supported by $2.5 billion in new capital investments.” 6. Long-term planning. “Michelin increased its capital base as it plans to build a new tire plant each year for the next five years, while Hankook, now the 10th largest tire manufacturer in the world, boldly rolled out a plan to become the fi fth largest within fi ve years.” 7. OEM success. “Who would have guessed that U.S. auto and light truck sales would have increased 14% in 2010, and that GM would emerge from bankruptcy and successfully go public once again?”

nearly 28% compared to 2009. Yet imports were way up. Who picked up the slack?

Ludwig: Chinese consumer tire imports in 2010 were, indeed, down about 30%, but imports from all other countries increased 50%, bringing the total number of imports up about 16%. Th e biggest increases came from Korea and Indonesia.

MTD: Is the tariff reduction from 39% to 34% — and to 29% next Sept. 26 — enough to signifi cantly increase Chinese imports in 2011?

Ludwig: Th e tariff for Chinese passenger and light truck tires was reduced 5% last September and will be reduced another 5% in September 2011. For 2011, I expect Chinese imports to increase about 10% even as prices on those tires have been increased due to higher raw material costs.

When the tariff was fi rst imposed, there was great consternation among importers of those tires, and it took a while to make pricing adjustments to justify beginning to import them. Some of the Chinese companies may have reduced their export prices to off set some of the tariff ’s impact. Chinese passenger tires imported in each of the fi rst three quarters of 2010 were as follows: 6.1 million in 1Q10, 6.8 million in 2Q10, and 7.1 million in 3Q10. It seems manufacturers and marketers became a litt le more comfortable importing Chinese tires as 2010 unfolded.

Ludwig (talking with his intern, Matthew Kukla) is getting used to his new digs in Cleveland.

MTD: What were the U.S. shipment highlights in 2010 vs. 2009 for passenger, light truck and medium truck tires?

Ludwig: What a difference a year makes (see chart on page 22). Replacement and OE shipments were up in every category in 2010. Th e previous year, they were all down dramatically.

Replacement passenger tire shipments last year broke the 200 million barrier again for the fi rst time since 2007, jumping from 189.5 million units in 2009 to 201 million in 2010. OE units were up 35%, from 24.3 million to 32.8 million.

Light truck tire shipments at the replacement level increased more than 5%, from 27.5 million units to 29 million. At OE, LT shipments were up 28.5%, to 3.6 million units.

In contrast to last year, medium truck tire shipments were up in 2010. Replacement units rose more than 17%, while OE units grew 29%., to 3.1 million.

In 2011, I predict shipments will continue their upward trend. My specific

Look for further consolidation among tire manufacturers and distributors, Ludwig says. Also, announcements may be forthcoming about new tire plants in countries such as India, China, Russia, Brazil, Indonesia — and even the U.S.

forecasts are as follows: Replacement passenger and light truck tires to grow an additional 2% and 3.6%, respectively. At OE, passenger tire shipments should increase 6.7%, while light truck tire shipments will grow by 7.6%.

Th is year also will be another great year for replacement and OE truck tire shipments, with each growing by 17%.

MTD: Will the change in the political climate in Wash

Domestic tire shipments, 2009-2011 (in millions of units)

Replacement 2009 2010 2011(est.) % change Passenger 189.5 201.0 205.0 +8.1% Light truck 27.5 29.0 30.0 +9.1% Truck 12.7 14.9 17.5 +37.8%

Original equipment

Passenger 24.3 32.8 35.0 +44.0% Light truck 2.8 3.6 3.9 +39.3% Truck 2.4 3.1 3.6 +50.0% Source: Northcoast Research Holdings LLC

ington, D.C., have an eff ect on tire manufacturers? Tire marketers? Tire dealers?

Ludwig: Th e political climate is unsett ling given the inability to get much done, although passage of several bipartisan bills at year end was a welcome change. Th e resolution of the tax situation was a good thing, so that gives manufacturers and dealers clarity to plan. But in the near future, politics may not have much infl uence on this industry unless there emerges some success in job creation. Jobs, more or less, will be the

biggest infl uence on the health of the tire industry. Raw material cost changes, year-to-year (in U.S. dollars per pound)

MTD: How did raw material costs in 2010 compare to 2009? Raw material Dec. 2008 Dec. 2009 Dec. 2010 How will raw material costs in 2011 % change % change % change

compare to 2010? Styrene 0.37 -36% 0.48 +30% 0.52 +8%

Ludwig: Raw material costs inButadiene 0.44 -15% 0.58 +32% 0.87 +50% creased an average of 25% in 2010 Natural rubber 0.57 -50% 1.27 +123% 2.06 +62% compared to 2009. In 2011, I estiCarbon black 0.47 +42% 0.37 -21% 0.42 +14% mate that, on average, raw material Zinc oxide 0.58 -50% 1.15 +98% 0.91 -21% costs will rise another 10%. Th at’s a Source: Northcoast Research Holdings LLC high number — infl ation is normally 3%. Using averages, however, may be misleading. So for greater clarity, I compared prices for raw Ludwig: As raw material costs increase, so will tire prices. materials in December 2010 vs. December 2009 to show more You can expect another round of price increases in 1Q11. Will dramatically what has occurred (see chart). Natural rubber was manufacturers be able to pass them on? up 65% and the cost of butadiene rose 50%. Also, how will the consumer cope with ever increasing tire prices?

MTD: Who were the market share winners and losers I think consolidation among tire manufacturers could occur. among tire manufacturers in 2010? I expect distributors will continue to consolidate.

Ludwig: Th e winners were Hankook, Falken, Cooper, Pirelli Despite tariff s, Chinese consumer tire imports may resume and non-Chinese imports. Share losers were Chinese imports and an upward path. Goodyear. Michelin, Conti and Bridgestone held fairly steady. Finally, I expect more plant announcements targeting countries such as Brazil, Indonesia, India, China and Russia. Th ere even

MTD: What are your top matt ers of concern or interest will be a new plant in the U.S. if Kumho goes through with its to watch out for in 2011? plans to build a plant in Macon, Ga. ■

Ludwig Report Look for tire demand and production to continue to increase

When the last round of forward. Truck and retreaded tire sales were strong, increasing tire price hikes were 13% in November year-over-year. announced last September/October, natural rubber was Costs and selling prices were up for major brands selling at about $1.50/lb.; today it is In comparing the month of November 2010 with October at $2.20/lb. Th ere are approximately 2010, average costs for size 215/60R16 major brand tires were four pounds of natural rubber in a conup 3% and selling prices were up about 6%. Th e average costs sumer tire, so that means the cost of a for a 215/60R16 private brand tire were down 1% while selling tire to the manufacturer has increased prices were essentially fl at for the month. $2.80 just from natural rubber alone in just three months! Also of note is Pricing remained normal to fi rm that the price of oil is now above $90/ By Saul Ludwig In November 2010, 33% of the passenger tire dealers described bbl., and since about 65% of the raw pricing as normal, 17% perceived pricing as aggressive, while materials used in a tire are oil-based, those raw materials also the remaining 50% thought pricing was fi rm. Conversely, 67% are going to move higher. So far, Goodyear had an 8% price hike of truck tire dealers suggested pricing was normal, while the on Jan. 1 for medium truck tires and Michelin announced a balance of the truck tire dealers believed pricing was fi rm. We 7% hike for some commercial tires starting next month, but I continue to expect manufacturers to raise prices this year. expect to soon hear of another round of price hikes for consumer tires from all manufacturers. Raw materials were a major headwind for tire How dealers view their near-term business manufacturers throughout 2010, and given my Dealers JUL AUG SEP OCT(R) NOV(P) NOV(09) expectation that tire demand (and especially tire production) will be growing throughout 2011, I see no reason to expect easing of raw material costs this year. Passenger tire Will improve 78% 40% 67% 33% 17% 58% Will worsen 0% 0% 0% 0% 50% 25% Will stay level 22% 60% 33% 67% 33% 17% Monthly survey Truck tire A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the November 2010 survey are compared with Will improve 43% 50% 40% 0% 0% 37% Will worsen 14% 0% 0% 0% 33% 25% Will stay level 43% 50% 60% 100% 67% 38% R-Revised P-Preliminary those of November 2009. Survey indicates tire inventories were in line Passenger tire dealers’ six-month outlook is mixed Sixty-seven percent of the passenger tire dealers noted that

According to our dealer survey, the majority of passenger tire their current inventories were in line with business levels, but dealers sense that in the next six months business will worsen, the remainder were mixed as 16% felt inventory was too high as truck tire dealers think the environment will remain the and 17% too low. Likewise, 67% of truck tire dealers noted that same. Roughly 50% of passenger tire dealers suspect business inventories were in line with business levels, while the balance will worsen, 17% expect improvement, while the remaining thought that their inventory was too high. 33% think business will remain the same. Approximately 67% of all the truck tire dealers sense that in the next six months Service revenues are up signifi cantly, dealers reported business will remain about level with currently strong busiAccording to our tire dealer survey, dealers who provide ness conditions, while 33% expect business to worsen. Th ese automotive service reported that 52% of revenues, on average, outlook comments tend to be seasonally directed rather than were generated by service during November. Dealers indiyear-to-year comparisons. cated that service business was up over 14% in November vs. All tire sales were higher in November most of 2010. ■

According to dealer reports, on average, retail sales of new

November 2009. Service business remained strong through replacement passenger tires were strong with many reporting Analyst Saul Ludwig is a managing director with Northcoast as much as a 15% increase in November vs. November 2009. Research Holdings LLC based in Cleveland, Ohio. He concentrates Some dealers we surveyed noted that traffi c was bett er than on the tire and chemical industries. He has been writing for Modern expected in November, and expect modest improvement going Tire Dealer since April 1975.