US tires: tariff expirations will not hurt Bridgestone

by SR on October 2, 2012

US tire prices before and after punitive tariffs were levied on tires imported from China

Tariff expiration is a storm in a tea cup; ignore and move on

Conclusion: the punitive tariffs levied since September 2009 by the US on tires imported from China have not materially benefited Bridgestone and other tier-1 brand suppliers and may have hurt them in some ways through restricting their own low-cost products. The expiration of the tariffs will likely be more positive than negative.

Just before the weekend, Bloomberg published an article about the ending of US tariffs on Chinese tyres, with the headline “Bridgestone Braces for Lower Tire Prices as China Duties Expire”. Bridgestone is doing nothing of the sort. The article is confused, misleading and wrong-headed, although probably not deliberately so. I’d better clear up some of the misunderstandings.

  1. The competitive landscape hasn’t suddenly changed.. The article claims that a Bridgestone spokesman said it is “preparing for increased competition”. This is a standard boilerplate response for a cautious Japanese manufacturer. If you ask them what they think about competition, they will say (a) it’s tough and (b) it’s going to get tougher. This is the standard response. In short, there is nothing new here, no change in the nature or structure of the competition.
  2. Tariffs are not the reason for higher tire prices. The chart above shows the monthly consumer price index for tires (or tyres) in the United States. In the three years since September 2009, when the US imposed punitive tariffs on tyres made in China, the price of tires in the US has risen about 13%. However, in the three years before in the three years before the 2008 pre-Lehman bankruptcy peak – which naturally knocked a little of the froth off prices – tire prices rose by 13.8%. Tariffs have not led to rising tire prices and the expiration of the tariffs will not in itself cause tire prices to fall.
  3. Higher input costs explain higher tire prices. The reason for these higher product prices is higher input costs, most notably natural rubber prices. The chart below shows natural rubber prices over the past few years. Unable to absorb those increases, tire suppliers decided that cutting product prices to gain market share was less important than rebuilding profit margins hit by higher costs. Tire prices have been rising globally, not just in the US.
  4. Bridgestone does not compete directly in the no-brand tire market. The tire market is largely driven by brand. If you buy a BMW, you don’t buy no-name tires from Wal Mart when the original equipment tires wear out. The typical BMW owner buys Continental, Michelin, Bridgestone or some specialist sports brand. Bridgestone’s exposure to the low end of the tire market – the ‘tier 3’ tires, where brand truly does not matter – is very limited. Bridgestone does have budget brands and the Primewell brand is made by Giti Tire in China on behalf of Bridgestone, but past comments from Bridgestone to me indicate this is a small part of its total sales in the US.
  5. The tariffs were designed to help unions, not tire suppliers or consumers. The complaint against Chinese tires was brought by the United Steelworkers Union. At the hearing held by US ITC on 2 June 2009, no major tire supplier spoke for the tariffs. Those in favour of the tariffs alleged that this was because the tire suppliers were afraid of retaliation in China. Given that the suppliers had and have substantial manufacturing assets in China and that they export from China to other regions (including the US), it seems simpler and more rational to conclude that the suppliers themselves did not want tariffs. Tariffs, inasmuch as they have any impact on the brand names, are negative and their expiration is positive.
  6. The ‘brand’ suppliers had already conceded the low end of the market. What struck me about the 2009 hearing mentioned above is how executives from several retail and distribution tire chains stood up and recounted how Goodyear and other US producers “wilfully” (their word, not mine) shifted away from the tier 3 market and “abandoned” that space. They also confirmed that the US tire market has clear segmentation into different tiers. These comments support our view that companies like Michelin have very little exposure to the low end of the market.

Natural rubber prices in Thailand in US$ per kg

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