Hilco is the leading appraiser of companies that participate in the automotive and transportation industry, and is active in reporting on all levels of the tire sector, including manufacturers, importers, distributors, and retail outlets. Hilco has appraised over two dozen tire companies in the past year, with aggregate sales approximating $18 billion. A few years ago, inventory and sales unit pricing were generally higher, but deflation has been the more recent trend.
One factor affecting pricing was the expiration of the U.S.-imposed punitive sanctions on Chinese-made passenger and light truck tires (PLT) in September 2012. Late in September 2009, under Section 421 of the Trade Act of 1974, the U.S. placed an additional 35% tariff (lowered to 30% and 25%, respectively, in the second and third years) on these tires. Due to higher raw materials prices (e.g., natural and synthetic rubber), along with punitive duties, the industry generally reported higher unit costs under margin pressures.
Raw materials prices for key components, such as natural and synthetic rubber, declined in 2013 and have continued to soften in 2014, and the ripple effects of expired tariffs have led to surging imports from China. An April 28, 2014, Tire Business report noted:
As of 2013, nearly one of every four passenger tires, one of every five light truck tires, and one of every three medium truck tires sold in the U.S. aftermarket was built in China. Quite a few of these are familiar private and/or associate brands owned or controlled by Chinese tire makers or offshore distributors. The trend is continuing thus far in 2014, with passenger, light truck, and medium truck tire imports from China up 15%, 47%, and 10% the first couple of months over 2013.
In light of the increased imports, it is worth noting the performance of leading domestic manufacturers. For example, in the second quarter (ended June 30, 2014), year-over-year, Cooper Tire & Rubber Company’s North American division sales increased 2.6% (dollars) and 9% (units); and The Goodyear Tire & Rubber Company’s North American division sales declined 7.0% (dollars), while its operating income increased 2.0%.
During the same timeframe, the United Steelworkers (USW) union was driven to take legal action. On June 3, 2014, the USW petitioned the U.S. International Trade Commission (USITC) for relief against PLT imports from China, as it had in April 2009. The USW reported that PLT imports from China more than doubled from 2011 to 2013, from 24.5 million to 50.8 million units. The USITC voted to proceed with an investigation into anti-dumping and countervailing duties on certain Chinese imports.
On July 22, 2014, Tire Business reported that September 17, 2014, would be the next milestone in the USITC investigation, although the final determination of duties – if so ordered – would not occur until mid-January 2015. On August 14, the deadline was extended to November 21. In a report dated August 21, Modern Tire Dealer noted that, “In its preliminary investigation, the ITC determined there is a reasonable indication that the tire industry has been affected adversely by a significant increase in PLT tire imports from China.”
As these dates approach, lenders should monitor inventory levels and mix of China-sourced PLTs, in addition to the approaches taken by various clients, as the uncertainty will impact every player in the industry.
The marketplace has also seen a number of consolidations, as distributors such as American Tire Distributors Holdings, Inc. (ATD) and retailers such as Monroe Muffler Brake, Inc. (MMB) continue to grow through acquisition. After expanding into Canada through acquisition for the first time in 2013, ATD, the largest tire distribution company in the U.S., was active in the first quarter of 2014, purchasing Terry’s Tire Town Holdings, Inc. (a tire distributor serving the northeastern U.S.) and The Hercules Tire & Rubber Company (a tire distributor, importer, and private brander, with locations in the U.S. and Canada). Meanwhile, in July, MMB announced the acquisition of 35 Tire Choice and Total Car Care stores, its first Florida locations, after closing on 19 outlets of Lentz USA and Kan Rock Tire & Auto, its first Michigan locations.
As in any industry, as buyers gain market share, suppliers face the risk that margins could compress and competitors might lose customers. These are other areas that lenders should watch closely.
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