Tire Makers Suffering Flat Growth

Firestone’s safety crisis comes as the global tire industry is fighting tough times, with most of the major tire makers struggling with languid profit growth and--in the case of the publicly held companies--lackluster stock prices.

Even the industry’s dominant player, Goodyear Tire & Rubber Co., has suffered from weak earnings gains and a stock that has badly trailed the broader market for several years. Goodyear, in fact, was dropped from the famed Dow Jones industrial average last year because of its track record.

Goodyear’s stock has spiked higher in recent days in response to Firestone’s worsening problems, and it gained an additional $1.44 a share to $23.56 on Wednesday in composite trading on the New York Stock Exchange. But U.S. share prices of other tire producers, based both domestically and overseas, have been little affected by Firestone’s saga.

Firestone is a brand made by Bridgestone/Firestone, a subsidiary of Japan’s Bridgestone Corp. In Tokyo, Bridgestone’s stock tumbled 185 yen, or $1.70, to 2,075 yen, or $19.09. The stock has skidded 15% so far this week.

Wall Street hasn’t been wild about auto-related securities in recent quarters, including the stocks of the big car makers and the producers of auto parts. But the tire sector itself is being hobbled by several factors.

Prices for rubber and other raw materials have been rising, yet tire makers haven’t been able to pass on price hikes of their own to consumers. The result: squeezed profit margins.

Even though U.S. sales of cars and light trucks have been robust this year, it’s not paying off for tire manufacturers because General Motors Corp., Ford Motor Co., DaimlerChrysler and other big auto makers extract favorable prices for giving tire companies such huge volumes of business, analysts said.

“The vehicle makers squeeze the [tire] manufacturers like you wouldn’t believe,” said Bob Ulrich, editor of Modern Tire Dealer magazine in Akron, Ohio. “That original equipment is not a high-profit area” for the tire companies, he said.

The replacement market does afford higher profit margins, and drivers’ demand for replacement tires has been rising steadily over the years. More than 200 million tires are expected to be shipped this year, compared with 152 million a decade ago, Modern Tire Dealer estimated.

Yet there’s no lack of competition for those customers, which is keeping supplies ample worldwide and adding to the companies’ struggle to raise prices. The rivals include not only U.S.-based companies such as Goodyear and Cooper Tire & Rubber Co. and Japan’s Bridgestone/Firestone, but also Yokohama Tire Corp. of Japan; Michelin of France; Continental of Germany, which also makes the General Tire and Uniroyal brands; and two South Korean tire makers, Kumho Industrial Co. and Hankook Tire Co.

The “supply of low-cost tires from far-flung locations into the developed markets seems almost inexhaustible,” and “we have too many goods chasing too few dollars,” analyst Wendy Beale Needham of investment firm Donaldson, Lufkin & Jenrette in New York wrote in a recent report.

Many observers expect the tire industry to correct that problem partly by launching another bout of mergers, just as they did in the 1980s. Those combinations included Bridgestone’s purchase of Firestone in 1988.

In the meantime, tire makers are frustrated by their inability to raise prices. “The consumer will pay $150 for a pair of tennis shoes, but won’t pay a price increase on a tire,” Ulrich said. “If you want to talk about a commodity product, it’s tires.”

Cooper Tire & Rubber is a good example of the industry’s struggle. Cooper has managed to post steady gains in sales and profit for the last three years, yet its stock has plunged nearly 50% over the last 12 months. It closed unchanged Wednesday at $10.88 a share on the NYSE.

The problem also was evident in late June, when Goodyear announced that its second-quarter earnings per share would be nearly 40% less than Wall Street expected, stunning investors. The shortfall came as Goodyear “continued to struggle with a slower-than-anticipated industry, market-share losses and the inability to recover rising raw materials costs,” analyst David Bradley of J.P. Morgan Securities in New York wrote in a report last month.

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Tired Out

The safety problems at Bridgestone/Firestone come as the tire industry is grappling with sluggish earnings and stock prices, even though sales are rising. A look at combined U.S. and Canadian market share, by brand:

Original-Equipment Tire Market Share

Goodyear: 34.%

Firestone: 20.7

Michelin: 14.4

General: 11.7

Uniroyal: 8.1

BF Goodrich: 5.3

Dunlop: 3.0

Bridgestone: 1.9

Continental: 0.8

Yokohama: 0.1

Replacement Tire Market Share (partial list; does not add to 100%)

Goodyear: 15.5%

Firestone: 10.5

Michelin: 7.5

BF Goodrich: 5.0

Cooper: 5.0

Sears: 4.5

General: 4.0

Bridgestone: 3.5

Kelly: 3.5

Multi-Mile: 3.0

Source: Modern Tire Dealer magazine

* MASSIVE RECALL

Firestone is recalling millions of suspect tires. A1

* FEARFUL CONSUMERS

Dealers are inundated with customers seeking new tires. A1