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January 23, 2006 01:00 AM

Economy up, economy down: Potential to make money remains, analysts predict

Kathy McCarron
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    Whether the U.S. economy is in a growth mode or a slump, there always is a place to make money, according to analyst Ed King.

    The director of small business services at Wayne State University in Detroit notes that even during the Great Depression two industries thrived—movie theaters and grocery stores. In today´s economy the tire industry can fare well whether the economy is growing or not. If consumers are spending, they buy new vehicles with new tires; if consumers are frugal, they keep their old cars and buy replacement tires and automotive services.

    King and other analysts predict the tire industry, like the U.S. economy, will grow at a modest rate in 2006, as it did this year. The Rubber Manufacturers Association expects the tire sector to enjoy continued steady growth in tire shipments after an expected record-setting year in 2005. The association projects total tire shipments to increase about 2 percent in 2006, mirroring the anticipated increase in the U.S. economy.

    However, the RMA anticipates a slight drop in original equipment passenger/light truck tire shipments because of a decrease in vehicle sales.

    Jonathan Steinmetz, an analyst with Morgan Stanley, agrees. "We continue to believe that higher interest rates and weaker used car prices, partially offset by strong consumer confidence, will constrain light vehicle sales for the next year, despite the year-end incentive push to increase sales," he said.

    The auto makers have painted themselves into a corner with enticing incentives to boost new car sales and essentially are buying market share while not seeing profits, according to King.

    Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Mich., concurs.

    "The Big Three have got themselves in a pickle," he said. "It will be difficult to wean consumers off incentives." He said there is always a segment of the population that wants new vehicles, but consumers have been conditioned to expect pricing incentives from auto manufacturers.

    However, the RMA predicts replacement passenger tire shipments will continue to thrive in 2006 as a result of an increasing number of vehicles on the road and more vehicle miles traveled.

    "Any type of repair business will do better in 2006 than in 2005," King predicts.

    Virag expects the miles driven by consumers will continue to increase despite the threat of high gas prices. When gasoline prices passed $2.50 per gallon last fall, it had a significant impact on consumers, but Virag said that as long as prices stay in the range of $2.20 per gallon, it´s an increase people can absorb.

    He predicts both the retail and commercial segments of the tire industry will do well in 2006. "People will continue to drive. They certainly will not eliminate driving with (gas) prices back in the $2.20 range."

    The automotive market may see a shift to smaller, more energy-efficient vehicles, he said, and the demand for new sport-utility vehicles—and their larger tires—will be impacted negatively. The RMA attributed a 2.5-percent drop in OE light truck tire shipments to the trend toward smaller-sized crossover utility vehicles that use passenger tires. It anticipates a continued slide in sales as those vehicles gain in popularity.

    Energy costs probably had the biggest impact on the tire industry as tire manufacturers hiked prices across the board during 2005. Retailers have been passing the increases on to consumers and the increases appear to be sticking in the market. "The increased tire prices are a direct relation to increased energy prices. They have to stick," Virag said. "If the tire manufacturers want to continue producing tires and expect a profit, the increases are here to stay."

    As for the commercial trucking industry, "trucks will keep rolling as long as the economy is rolling," Virag said. The RMA expects continued increases in both the OE and replacement medium truck tire markets with growth in industrial production and freight movement.

    Fuel prices are an important variable in the commercial business, King said, but if a trucking company can control costs, it can do well despite higher gas prices.

    Analysts advised small business owners that as long as the economy is growing, it is a good time to spend money on capital improvements and hire the necessary employees.

    "Do it now while the times are good," Virag said.

    He acknowledges that energy costs, even for heating facilities, will have a hard impact on small businesses, "so they need to get lean in other areas of their operations."

    King said competing only on price can be a big mistake. "There´s a market out there for $10 watches, and a market out there for $100 watches," he said.

    The high-performance market is a perfect example. Despite the ups and downs of general consumer confidence and spending, the pricey HP market has continued to have a loyal customer base.

    "That´s a niche that´s immune to increases in energy costs," Virag said, describing HP as a small but highly profitable niche market. "People will give up a lot of things before they give up their high-performance tires. They´d give up their Starbucks before giving up their high-performance tires. And that´s saying a lot."

    The RMA reported that HP replacement tire shipments increased 5 percent in 2005 while ultra-HP tires jumped 14 percent. The association expects moderate growth in this market for the coming year.

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