Tires and Inner Tubes

SIC 3011

NAICS 326211

Known in British usage as "tyres," this industry's output includes tires and inner tubes for all types of vehicles, aircraft, bicycles, motorcycles, and farm equipment.

INDUSTRY SNAPSHOT

The global tires and rubber industry was valued at $53.3 billion in 2003. A mature industry, growth rates in most regions continued to be relatively small, with little possibility of a projected dramatic increase. Most large tire makers experienced a surge in sales in the mid-2000s due to the robust economies of North America, Europe, and Asia, and as the global economy improved from the beginning of the decade. Worldwide, demand was expected to rise about 25.7 percent by 2008 to reach a value of $66.9 billion.

In April 2004, the Rubber Manufacturers Association revealed that U.S. tire shipments increased 0.6 percent from 2002 to 2003, supported mainly by the replacement tire market. However, in 2004 the association expected shipment growth to reach 3.2 percent, fueled by general economic improvement and recovery within the commercial trucking industry. Tire shipments were expected to grow at an annualized rate of 2 percent into the late 2000s, rising from 310 million units in 2003 to 350 million through 2009.

Heading into the mid-2000s, the industry was dominated by a cosmopolitan array of seven multinational corporations—one headquartered in France, one in the United States, three in Japan, one in Germany, and one in Italy. Although the industry's top seven companies shared more than 73 percent of worldwide sales in 2002 (the top three alone accounted for nearly 56 percent), manufacturing of tires—a long-established commodity—is characterized by intense competition, most of which takes place in the realm of product development and innovation, though not always to the benefit of sales figures. A spate of mergers in the late 1980s and early 1990s presaged an intense examination of capacity, employment levels, and productivity. The top players in the global tire industry, as in the automobile industry to which it is closely allied, purchased or moved production facilities in order to reduce labor costs, take advantage of currency fluctuations, and circumvent trade limitations. Dominant concerns of these leaders included reduction of acquisition-related debt and overhead, retention and augmentation of market share, and recycling of waste tires.

Many industry observers have pointed to the strategic alliance between Goodyear and Sumitomo Rubber, which allowed Goodyear to make Dunlop tires in North America and Europe and Sumitomo to make Goodyear tires in Japan, as the precursor to another industry reshuffling mirroring, albeit on a smaller scale, the consolidation of the late 1980s. The second-tier firms—those falling just below the "Big Three" of Bridgestone, Michelin, and Goodyear in sales—are likely to get squeezed between their larger multinational competitors and the smaller regional and niche market firms. Some analysts believe that alliances with the Big Three will be necessary for survival in the twenty-first century.

Technological trends also promise to play a major role in the industry's future. From the late 1990s through the mid-2000s, companies worked to develop "run flat" tires, which continue to function for a specified period of time after being punctured. Overall, product development was geared toward longer-lasting tires, which inherently delimits future sales. But in this technology-driven market, durability was one of the premier selling points for customers, and thus companies attempting to maintain market share were required to invest heavily in this type of development. As of 2004, run flat tires were poised for strong growth during the remainder of the decade.

ORGANIZATION AND STRUCTURE

Tire sales are divided between the original equipment and replacement markets. Original equipment sales are made directly to auto manufacturers and comprise less than one third of the total market. Unit sales of replacement tires total over two-thirds of worldwide sales. During periods of economic growth, when new automobile sales typically surge, original equipment tire sales sometimes keep pace with sales of replacement tires. For example, global original equipment tire sales grew 4 percent in 2000, roughly the same rate as replacement tire sales growth that year, due to the highly favorable economic conditions that fueled record levels of automobile production.

The original equipment manufacturer (OEM) market offers both benefits and drawbacks. OEM sales can increase a tire maker's market share at a minimum advertising and distribution cost. Moreover, since car owners tend to replace original tires with the same brand, it follows that more OEM sales mean more replacement sales. Competition in this business segment is intense and automakers often use their buying power and marketplace clout to negotiate ever-lower margins on OEM sales.

The replacement market has proven more stable and profitable. Whether consumers purchase new cars or not, they need to replace worn tires. Tire makers also garner significantly higher profit margins on retail replacement sales. Ironically, the industry's development of longer-lasting radial tires has stunted this segment's growth. Some analysts predict that the private-label segment of this market is the key to future sales, but they caution that this shift may "cannibalize" premium brands or dilute their image.

BACKGROUND AND DEVELOPMENT

The history of the tire industry is intimately connected to the development of rubber, since virtually all tires were made from natural rubber until World War II. Early European explorers noted that indigenous peoples used the gum from certain trees for a variety of purposes, from constructing toy balls to waterproofing garments. Known initially as "caoutchouc," rubber earned its common name for its capacity to rub out pencil marks. In early nineteenth century Britain, Charles Macintosh and Thomas Hancock developed elementary processing techniques for the manufacture of rubberized rainwear that came to be known as "mackintoshes."

Rubber remained an unreliable substance, however. It was sticky and smelly, and subject to vast changes in consistency when temperatures changed. In 1839 the American inventor Charles Goodyear combined rubber, lead, and sulfur in the presence of extreme heat to create what he called "vulcanized" rubber. Although he himself did not benefit from the discovery, Goodyear's process formed the foundation of the global tire industry.

Most early tires were made of solid rubber. British engineer Robert William Thomson has been credited with the concept of a pneumatic, or air-filled, carriage tire, but his 1845 patent was not applied commercially for nearly half a century. Scottish veterinarian John Boyd Dunlop developed and patented pneumatic bicycle tires in 1888. His invention featured an inner canvas tube with a valve for inflation and an outer shell of vulcanized rubber, all mounted on a solid wooden rim. Detachable pneumatics were developed almost concurrently in Britain and France in the 1890s. In 1895 the Michelin brothers, André and Edouard, patented the world's first pneumatic auto tire. Virtually all the world's major tire producers were launched by the turn of the century. Although most early tires were designed for bicycles, the tire industry was soon intertwined with the automobile industry, which added a new and seemingly insatiable outlet in the early twentieth century.

Whereas rubber tree cultivation is limited strictly to equatorial regions with annual rainfall of 100 inches (2,500 millimeters) or more, global centers of natural rubber production are located in Southeast Asia (especially in nations on the South China Sea such as Malaysia) and West Africa (such as Liberia and Nigeria). Until the 1940s, all the world's rubber originated from these regions. Chemists and engineers struggled for decades to create a viable synthetic rubber and thereby reduce reliance on natural resources. The first synthetic rubber was developed in Germany during World War I. When Asian sources of rubber (which had supplied over 95 percent of U.S. tire manufacturers' needs) were cut off during World War II...

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