(Akron/Tire Review) As the old saying goes, “Things will get worse before they get better.” That’s the operative statement for the North American commercial tyre industry in 2007.
In a proverbial nutshell, the OE forecast for 2007 looks down, while the replacement market will rebound from 2006.
The main impetus behind that forecast rests in Washington, D.C. An EPA diesel-engine emissions regulation taking effect this year is having a ripple effect on the commercial tyre market, and, according to several tyre manufacturers, that wave won’t break until 2008.
In 2001, the agency adopted new emission standards for heavy-duty diesel engines, requiring the introduction of new, highly effective control technologies, beginning with a phase-in over the 2007-2009 model years. In a statement, the agency said, “We expect that diesel particulate filters (DPFs), also called particulate traps, will be used to meet the new standards on heavy-duty diesel engines, beginning in 2007.”
Dan Ralich, vice president of sales for R&R Truck Sales in Akron, Ohio, an authorised Mack Truck distributor, says, “Originally, the EPA said that trucks built after Jan. 1, 2007, must comply with the new regulation, but they amended it to specify the engines.”
Ralich says that engines built prior to Jan. 1 cost between $25,000 to $30,000. With the new EPA-mandated additions, dealer costs increased $7,000 to $20,000, depending on horsepower and other requirements.
But, how is the new standard affecting tyremakers and commercial tyre sales for 2007?
“It’s a matter of economics,” says Marc Laferriere, vice president of marketing for Michelin Americas Truck Tires. “The new engines are more expensive, and as a result, there was a great deal of pre-build and pre-buy in the trucking industry. Many operators wanted to buy before the prices increased.”
That translated into more tyres being shipped in 2006 than were predicted for 2007.
Laferriere’s logic is consistent with an earlier forecast issued by the Rubber Manufacturers Association. The RMA confirmed that, when the annual tally is completed, approximately 6.8 million OE units would be shipped in 2006, for an increase of nearly 9%, or 560,000 units, over 2005. RMA attributed the increase to “the significant growth of sales of commercial truck vehicles over the calendar year as a result of continued vehicle replacement demand and response to changes in 2007 EPA emission regulations.”
That’s the good news. For the 2007 OE market, RMA adds: “A sharp decline of approximately 20%, or approximately 1.5 million units, is anticipated in 2007, to 5.4 million units, given that some pulled-ahead truck sales that would have been realised in 2007 are being shifted to 2006.”
In other words, 2006 sales went the way of Peter and Paul. At least on the OE side.
Goodyear also believes the boom will slow in 2007. “We definitely see a slowdown in market growth, particularly at the OE level, based on pre-buy of trucks prior to the new tighter emission standards,” says Jeff Johnson, Goodyear’s director of customer and strategic marketing. “The entire U.S. original equipment tyre industry is expected to decline by approximately 20%.”
Johnson points to further potential strains on the truck market for 2007.
“Obviously, the well-known softening in the broader economic markets is a concern, as well as the expected slowdown in OE from the fleet pre-buys,” he says. “The oil market remains volatile, and fuel efficiency is a prime concern as fleets continue to look for ways to conserve energy.
“The cost of diesel is only a sliver of the picture,” he adds. “Fleets are starting to look to the tyre industry for help as the new ultra-low sulfur diesel fuel and new truck engines deliver potentially reduced miles per gallon.”
Continental Tire North America’s Mike Barker, director of NAFTA truck tyre sales, agrees with his tyre industry colleagues on the 2007 forecasts but believes the downturn actually started much earlier than most believe.
“From the OE standpoint, it could likely have started in the second half of 2005,” Barker says. He points out that the EPA mandate already was on the books and believes that the pre-build began at that time.
“However, we believe that, by mid-2007, things will pick up,” he says. “The economy will be good, even though housing will be soft, but big-ticket items, clothing and food will be in demand, and trucks will be needed to carry those supplies. There will be enough demand, primarily for steer tyres, that will help the market.”
Bridgestone/Firestone North American Tire (BFNAT) didn’t vary from the rest of the pack. “The 2007 sales forecasts for BFNAT are in line with that of RMA,” says BFNAT. “We foresee an appreciable decrease in sales to the original equipment segment for reasons that include new engine regulations and emissions-related price increases.”
But dealers don’t make the OE sales, and the news is better on the replacement front. Tyremakers say replacement shipments should remain strong this year and into 2008 as 2006 pre-buys come into first replacement.
The RMA projected the replacement segment to decrease by approximately 2%, or 300,000 units, to 17.2 million units, in 2006. However, RMA expects shipments to increase by nearly the same number of units in 2007, to reach 17.5 million units.
“We always look at the economic indicators, and they have been average,” says Michelin’s Laferriere. “They are not as strong as we’d like them, but they are not catastrophic.”
While the housing market continues to soften, the manufacturing sector – where the trucking industry is most strongly aligned – is likely to remain up – provided oil and energy costs remain steady.
“There is a cyclicality of the market,” says Laferriere. “It appears that the slowdown in the replacement market is similar to the 2005 to 2006 results where there was not much growth. The good part of the strong OE sales of 2006 is that we now have a lot of new equipment with new tyres. And, in this cycle, it means that, by 2008, we should see an improvement in the aftermarket.”
Eye on Opportunity
Goodyear’s Johnson cautions that “the replacement market also may see a softening if more sectors follow the housing market decline, but remember that this is softening from some pretty high levels. Replacement tyres should range somewhere between flat to 1.5% growth” this year.
Johnson and Goodyear believe that, even in the soft markets, there are opportunities and urge their commercial tyre dealers to continue working to take advantage of those opportunities.
“We have long maintained that, to keep business strong, dealers need to laser-focus on delivering value to end users,” says Johnson. “In my view, this requires continuous assessment of needs and a commitment to offering products and services that allow the business to generate healthy returns in the face of a changing environment.
“In short, they need a focus beyond the arms-length tyre sale transaction. They need to also realise that there are pockets of opportunity in the marketplace that, together, we can mine.
“The commercial trucking industry is and will remain strong, despite the recent softening,” Johnson says. “Pockets of growth are available in areas untouched by new emissions standards. In addition, there remains a tremendous opportunity to deliver value to the market through services that follow a fleet’s original tyre purchase through several retreads, delivering lower costs per mile.”
In line with Johnson and Goodyear’s opportunistic approach, R&R Truck Sales’ Ralich offers an interesting outlook for his industry: “The overseas market is growing, and those sales could pick up some of the slack (of the domestic downturn), and the refuse industry is still a big demand.”