Mature plants. High cost structures. Legacy costs. Foreign competition.
Tire manufacturers can recite those and other issues, chapter and verse, over and over. Cost is king, most say, and without major improvements on that end, it's difficult to compete effectively in the U.S.
That doesn't mean they're leaving U.S. soil any time soon. Companies such as Cooper Tire & Rubber Co., Michelin, Goodyear and Continental Tire North America Inc. said they plan to make tires in the U.S. for a long time to come.
But most are moving portions of their manufacturing base-primarily low-end tires-to China and other countries to cut costs. Which raises the question, can higher-end brands be far behind?
"Without question, the single greatest challenge tire makers face today is foreign competition, primarily from low-cost countries such as Korea and China," said Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Mich.
"While the current competition is for low-end tires today, one can only expect the quality of imported tires to increase. Over time, competition will only intensify."
The cost of labor is another primary factor that frequently pops up with U.S. tire makers when they talk about manufacturing offshore, although not everyone agrees.
"High wages don´t necessarily translate into high costs," according to Dick Wilkerson, executive vice president for Greenville, S.C.-based Michelin North America Inc. "The U.S. is a high-wage market, but not necessarily high cost. To compete, we have to make production gains and sound technological investments, while controlling our costs."
Tire manufacturers, however, face plenty of other difficulties.
"Our major competitors still have these mature mega plants," large volume, conventional technology and a lot of legacy costs, observed Jim Hawk, senior vice president and plant manager for Toyo Tire North America Inc.
Toyo, a subsidiary of Toyo Tire & Rubber Co. Ltd. of Japan, is the new kid on the block. It opened its first U.S. tire plant in White, Ga., in late 2005 and has been making gains in the market since then.
"Growing the way we have done, we have been better able to manage the expense side of the business," he said. U.S. manufacturers are more mature, Hawk said, and many are relying on smaller continuing operations to cover pensions and health care for their retired workers.
Managing costs
To remain successful in the U.S., tire manufacturers must focus on cost management and quality, according to Virag. "Both can help defend against competition from low-end countries. I am not implying companies should continually demand wage concessions from labor. Instead, the best way to lower costs and increase quality is by leveraging the human asset through the process of innovation."
High-performing companies know how to control costs by developing products and manufacturing processes that competitors can't replicate, he said. "This strategy allows them to both differentiate themselves in the product area and position them as the low, or near-low, cost manufacturer."
Cost-cutting has been a way of life in the tire industry over the last several years. Michelin, Bridgestone/Firestone, Continental and Goodyear closed plants, trimmed jobs, phased out lines or cut back production in 2006 while Cooper cut 500 at its Texarkana, Ark., plant, switched the facility to a flex operation and eliminated some tire lines.
Earlier this year, Akron-based Good-year said it will freeze its defined benefit pension plans for employees and replace them with 401(k) savings accounts as part of several moves to save about $100 million on pension obligations and $525 million on other post-retirement benefits.
The action is part of its plan to reduce costs by more than $1 billion by the end of 2008. That includes plans to close or end tire production at five plants globally.
Charlotte, N.C.-based Continental, the North American arm of Germany's Continental A.G., has reduced its manufacturing base to one non-union factory in Mount Vernon, Ill., from four plants in the U.S. as it beefed up its Mexican facility and opened a large tire plant in Brazil. Those moves have cut its costs significantly, said Alan Hippe, president of Continental North American Tire.
"We made a strategic decision early on, however, that instead of putting off tough decisions and just hoping things got better, we would do our best to work with employees to take action and initiative on the front end," he said.
In the current business environment, the No. 1 factor in determining whether or not a company remains in the U.S. is its ability to become and remain competitive, Hippe said.
"Fortunately, we have made great strides in this area over the past year by successfully implementing cost-reduction initiatives and achieving a significant reduction in our process costs," he said. It's essential that labor costs and productivity come together, he added. "Even with lower costs, we can produce tires at a higher level."
Gaining ground
Findlay, Ohio-based Cooper, which has struggled for the last few years, is showing signs of major improvement, said Roy Armes, who took over as president and CEO at the firm in January. The company must reach a higher level of productivity, aggressively strive to trim costs, constantly improve quality and continue to build a lean organization to remain competitive in the U.S., he said.
Armes said the company has made big strides in all those areas and that Cooper's fill rates are now more than 90 percent and climbing.
"We're optimizing our U.S. manufacturing plants and maximizing our global operations," he said. "In the U.S., we have three plants (Albany, Ga.; Findlay; and Tupelo, Miss.) that run 24/7. We use our Texarkana, Ark., facility 24/5 as our flex plant. We´re focusing on lean and Six Sigma initiatives on the manufacturing and business sides over the short and long term. We're looking at all facets of the business to make improvements."
Cooper is making a strong effort to automate both in the U.S. and globally, investing half to three-quarters of its capital expenditures to upgrade its plants. That will help improve quality, avoid errors and improve productivity, Armes said.
Goodyear figures it can successfully make tires in the U.S. as long as it manages its cost structure. "The series of actions we have taken over the last several years, including the new labor agreement we recently negotiated with the United Steelworkers, gives us the financial flexibility to invest in our North American plants and continue to develop exciting, innovative products," a company spokeswoman said.
In its recent contract agreement with the USW, the company committed to paying $1 billion to establish a trust to pay medical and prescription drug benefits for union retirees. It's expensive now, but will save Goodyear money down the road.
The spokeswoman said that by establishing the trust, the firm believes it has found a solution that contains its legacy costs but provides benefits for its USW retirees.
Toyo's Hawk said most U.S plants aren't flexible enough. "When you have a plant that's making 50,000 to 60,000 tires a day and the market changes on a dime, how do you react to that?" he questioned.
"The advantage we have is we're extremely flexible. We don't live and die with the original equipment business," Hawk said. "So I really wonder how these mega plants will survive. A lot will say they have automated equipment, but there's still lots and lots of people involved. There´s nothing out there like what we have," referring to Toyo's highly automated Advanced Tire Operation Module tire production system.
Driving forces
Several tire makers disagree with Hawk on their automation initiatives. Cooper, Goodyear and Michelin all can point to improvements they have made or will make on the technology and automation ends. And each touts a strong work force that's both talented and experienced.
"Automation is related closely to production costs," Michelin´s Wilkerson said. "Having productive processes is critical, and automation today is (the) key. In terms of product offerings, with leading edge technology, customers want to see a revival of a product, not a repackaging. They want value-added products and leading edge technology drives that. And we're committed to it."
On the other hand, while Continental claims to be ahead of its competitors in the technology game, Hippe said it doesn't rely as much on automation. "The more you automate, the less flexible you become. That's why we went low-cost production. You can't resolve everything with automation."
Hawk maintained there are three major components to tire manufacturing: raw materials, fixed assets and labor. He said most tire makers are in the same boat with regards to raw materials, but the majority of companies put too much focus on lower labor costs, and not nearly as much on upgrading fixed assets.
"We wonder about that," he said. "You go to a low-cost country to get your wages under control, but what do you trade in terms of inventory and shipping expenses?"
That may be an accurate assessment, but why would well-established U.S. tire manufacturers build modern plants in America unless large incentives were being offered by a state or city, questioned Bill Hyde, director of C4 olefins and elastomers for Chemical Market Associates Inc. in Houston.
Average wages within the tire industry in the U.S. are higher than those in Poland and China by factors of more than 5 and 17, respectively, he said. Direct labor costs make up about 20 percent of the cost of a tire, and Chinese labor might be available at a factor of 30 less, he said.
Companies make automation investments where they will do the most good, Hyde said, noting he hasn't seen many cities or states come up with a generous enough package to attract many tire makers. He noted that a grass roots organization even fought Toyo's move to Georgia. "It would take a huge package of incentives to draw someone to build a new plant" in the U.S., he said.
Automotive Consulting Group's Virag said China, in particular, is positioning itself to become a manufacturing powerhouse in the tire industry.
Because of that, U.S. management and labor must achieve labor harmony, he said. "Both sides need to understand the competitive environment and work together to maintain a competitive advantage and local jobs. The sharing of risks and rewards should be equal for both sides."
Remaining focused
Michelin, the exclusive supplier of tires for the U.S. armed forces, considers itself a global company, and clearly prefers to have a manufacturing base in markets it serves. "The responsiveness is better and we have lower supply chain costs," Wilkerson said. "That's our preference. But you have to have a sustainable business model. We think our plan is one that allows us to win now."
Between 90-95 percent of what it sells in the U.S. is made in the country, where it employs 23,000 at numerous sites.
Continental is focused on a three-year plan to increase product offerings and improve market coverage in the light truck and high performance tire market segments. During that period, the company hopes to introduce 500 tire products, Hippe said, including new product lines and extensions of current lines for both its Continental and General brands.
He said Conti has gained substantial market share in the original equipment segment in the U.S. over the last few years. That gives the company natural growth potential in the replacement tire segment, he said.
Continental is investing between $70 million and $100 million in its Mount Vernon plant over the next three years. "We have produced high-end tires in the U.S. for a very long time and plan to continue doing so," Hippe said. Its low-end tires are manufactured in Brazil.
Cooper, which primarily deals in the replacement tire market, is focusing on aggressively and quickly improving its cost structure and upgrading quality and service, Armes said. The company makes mostly high-end tires in the U.S. and, like virtually all U.S. tire manufacturers, it plans to shift its low-end production to its plant in China.
Michelin's Wilkerson said it can be cost-effective to produce tires in the U.S., "and for us it is, with the sustainable, long-term plans we have. The bottom part of the market has been attacked by the Chinese. We have to keep developing production and cost strategies to prevent erosion in other parts of the market."
Down the road, he said, the company likely will have substantially the same capacity to serve the market. But Michelin must be more productive and efficient.
"We will be here," Wilkerson said. "We're in an economic war, and we don´t intend to lose the war."
Brad Dawson and Bruce Meyer, Rubber & Plastics News staff, contributed to this report.
