European Truck Tire Market: Treading Through Trying Times
European Truck Tire Market: Treading Through Trying Times The European truck tire market is heading for a tough, but important phase in its existence. Tire manufacturers are facing increasing pressure from all sides. While the replacement market has witnessed a flat demand, OE sales have been negative. On the cost front, raw material prices have been on the rise. With the tire manufacturers facing intense pressure on the top and bottom lines, Anil Valsan, Research Analyst at Frost & Sullivan ( http://transportation.frost.com) looks at whether the tough get going or whether the going eventually 'gets' the tough. Europe ranks third, after Asia and North America, in the $ 19 billion world market for truck tires. It is also home to some of the world's largest tire makers: Michelin, Continental, and Pirelli. The composition of the European market for truck tires is shown in Chart 1. The truck tire market in Europe is made up of the OE and replacement segments, with shares of 17 and 83 percent respectively. With the replacement market accounting for such a high level of demand, tire makers are required to have a wide geographical presence in order to provide adequate service to their customers. Many tire makers have a major presence in the distribution chain as well. For instance, Europe-wide Euromaster distribution network is owned by Michelin, while Pneus-Expert network is owned by Continental. Trying Times The tire market has been directly affected by the slowdown in the European economies. The major markets in Europe-France, Germany, UK, and Italy-have been experiencing a slowdown in demand for heavy commercial vehicles, which is expected to continue for at least the next 12 months. Another contributing factor is the low demand in the replacement market, especially for snow tires, owing to abnormally warm temperatures throughout Europe. Winter tire shipments are believed to be the lowest since 1989. The tire market also witnessed an increase in raw material prices, which was further aggravated by the weak Euro. The increase in cost has been passed on to the end-users through price increases announced by tire manufacturers. Continental has declared an 8 percent fall in its commercial vehicle tire sales for first half of 2001. While Goodyear has seen an increase in terms of volume, it has not translated into revenues owing to factors such as competitive pricing and a shift in the product-mix to lower-priced tires. However, the limelight is on Pirelli, as it put its truck tire division up for sale. Under these circumstances, tire manufacturers are undertaking strategies like cost reduction and vertical integration to weather the slowdown. Cost Reduction: Reengineer, Retrench, and Relocate The European industry is credited with the highest cost structure (almost 50 percent higher in some cases) for manufacturing tires. This limitation is prompting manufacturers to look at alternative processes and facilities to make tires. Today, each of the manufacturers has developed its own technology which enables increased levels of automation, reduced capital expenditure, greater flexibility to manufacture a variety of tires, and reduced break even production levels. For instance, Michelin has developed the highly secretive C3M process, which it claims reduces the labor required to one-tenth. Similarly, there is the Impact process by Goodyear, ACTAS (Automated Continuous Tire Assembly System) used by Bridgestone, and MMP (Modular Manufacturing Process) of Continental. Severe cost reduction measures are also being taken to remain competitive. For instance, in the case of Michelin, the Wolber facility in France was closed down in February 2000. The company also plans to implement 7,500 position cuts before 2003, out of which 5,200 were announced for Germany, Spain, France, the United Kingdom, and Poland. 2,900 of those cuts have been actually implemented. Tire manufacturers are increasing investments in their facilities outside Western Europe in an attempt to reduce costs. For instance, Michelin and Goodyear have majority stakes in the Polish companies TC Debica and Stomil Olsztyn respectively. Around 65 percent of Stomil's exports and 80 percent of Debica's exports (as per 1996 statistics) are to the European Union. Vertical Integration: Going Up the Value Chain Unlike passenger cars, the tires for commercial vehicles can be retreaded at least twice at a fraction of the replacement cost. The market for replacement tires faces a direct threat from this demand as it delays the buying process. The economic viability of this option for fleet owners also poses a strategic business opportunity for tire manufacturers. Although tire manufacturers have retreading facilities, the lack of volume has restricted their activities in this segment. However, it has resulted in the tire manufacturers either entering into an agreement with well-established retreaders or taking over such operations. A recent development was the agreement between Continental AG and Bandag AG, Lachen, Switzerland (a wholly owned subsidiary of Bandag, Muscatine, Iowa, USA) to start a collaboration for truck tire retreading activities in Europe. Another example is Michelin's (whose subsidiary Recamic markets the cold retreading process) takeover of the Romanian company Nomura International, which has retreading interests apart from truck and passenger car tire manufacturing facilities. The Tough Get Going? Bridgestone/Firestone Europe is now equipping its European network of Truck Point dealers with specially created software to maintain an electronic record of the condition and performance of tires. The software will enable specialists to give reliable advice on optimal running set-ups and timely indication when positional changes or replacements are due. The product is already making an impact, as fleet management information has become a vital asset influencing the tire product and service provider selection process. The European market will also witness increased imports in the short term, as tire manufacturers and OEMs utilize the facilities in Eastern Europe and other parts of the world (such as China) to meet their requirements. While Michelin is bound to maintain its lead in this market, the takeover of Pirelli's division can increase the lead over its competitors. On the other hand, a winning bid from Bridgestone or Continental could narrow the gaps in the second tier of this industry. The tightening grip of large companies like Michelin, Continental, Goodyear, and Bridgestone will force more small companies to either put up their facilities for sale or move up the value chain providing services such as maintenance and retreading. These changes are bound to realign the industry in terms of market shares, manufacturing logistics, costs, and services provided to the end-users. In all, as the tough get going, the industry is bound to emerge stronger than ever before as the current slowdown in the market reverses. http://transportation.frost.com is Frost & Sullivan's new innovative and interactive homepage aimed at the global automotive and transportation industries. Bringing together the experience of our team of analysts positioned around the world, transportation.frost.com offers unrivalled market analysis of all sectors of the automotive and transportation industries. For more information contact: Nikki Cole nikki.cole@fs-europe.com Tel. +44 (0) 20 7343 8325 http://transportation.frost.com http://pressroom.frost.com