Q: How is Sumitomo reacting to this trend?
A: Sumitomo Rubber North America, our path right now is we believe we have a very, very strong independent dealer base. Our independent dealer base is fragmented, which is good. We do have a very strong relationship with ATD, so it's in our interest that they survive.
Ultimately what we are going to watch is the balance between the strength of the manufacturer and the strength of the distributor, and right now both parties need each other. Because if first tier is going to create its own channel — which it is starting to, right? — TireHub and NTW, that's the first tier creating its own path to the market. When they do that, they are less aligned with regional distributors. Therefore, regional distributors need brands. The brands that remain are second-tier brands.
The second-tier brands are going to need options in the event that something were to happen to ATD. Because as much as we love ATD and have a great relationship with them, anyone who loses 50 percent of their business because of a change in the market is going to have challenges.
Can they make adjustments? Of course they can, but over time, obviously, any good company is going to have countermeasures and other options. Those other options are simply going to be regional distributors. So the regional distributor is going to become more important. Not that they aren't important now, but they will become vitally important.
So both second-tier and regional distributors are going to be in a lot of conversations over the next 12 months all trying to hedge their positions.
Q: Is Sumitomo hoping to fill the void of Goodyear products no longer sold through ATD?
A: Falken brand is essentially always sold to ATD. And Falken products are relatively price-positioned and do not necessarily compete against Goodyear's products.
I would say that Goodyear is the least disciplined in their pricing model, which means that in any particular segment they will operate from a price index of 100, which is where they should be, down to 65 with other Goodyear products. And when they go down to somewhere between 65 and 85, now they're in the Falken price zone, or they're in the second-tier price zone. You do not see that occur with Michelin, you do not see that occur with Bridgestone.
Goodyear is the only one that has a very, very wide pricing window. So there will be some places like light truck and SUV where the Falken brand actually does challenge Goodyear pricing, and we believe we're going to receive some of that business.
But again, tires are channel specific, so if those were Goodyear retailers that were beholden to the Goodyear brand, they've got a bigger paradigm shift than just to look at Falken vs. Goodyear. They've got a bigger decision to make, and all brands will be looking at that.
But someone is going to fill that void in the event Goodyear can't circle back with the regional distributors and get service to those customers.
In the short term, Goodyear did not have enough distribution in place to fill the void. So ATD is going to need something because they're going to have demand, and Goodyear can't respond quick enough. So yes, we're definitely hoping that dealers that were buying Goodyear at that 75 percent index price will consider our brand.
Q: What tire sectors are looking strong this year?
A: Everything from touring to ultra high performance is now becoming one blurry segment. I would call it the traditional grand touring segment, which is now everything T, H and V (rated), 50- and 55-series. Those products are selling very, very well. All-terrain continues to be a great segment.
Medium truck right now is doing very well. We just don't see any segment that is really struggling. All the segments are behaving in very predictable ways right now. For us the light truck market continues to be great because previously we didn't have a large share, (and) now we have one of the best tires in the market and it's doing great for us and our distribution.
Q: Is the popularity of CUV/SUVs impacting the UHP market?
A: It definitely does because ultra high performance was 50-, 55-series, 17-, 18-inch. That was traditional high performance 40-45 series. But now the amount of 40-55-series, 17, 18 and 19 has just exploded, and those are on every vehicle on the road. Therefore, if you're going to define ultra high performance, you also have to say it's only summer tires.
If it's a summer tread design, you can be pretty well assured it's an ultra high performance tire or if it's below 40 series, it's an ultra high performance. But anything 45 series and above regardless that could be in touring, that could be ultra high performance, it could be anywhere right now.
The CUV customers are looking for a size and a price and hopefully a brand preference. So they're less concerned about performance and more concerned about mileage warranty and potentially wet traction, things like that. All of those customers are going to be more safety- and value-oriented, less about performance.
Q: Do you think UHP is losing popularity?
A: Traditional ultra high performance was a lot of this aftermarket image performance tires, on an aftermarket basis that's now being primarily dominated by third-tier. True ultra high performance, let's call that replacement tires to a Mercedes S-Class or an Audi A6, those are going to be dominated by really first and second tier as OE replacements.
So there's kind of a no man's land in ultra high performance which is a medium-priced, first replacement product sold by the second tier — ultra high performance no man's land. …
Ultra high performance is still a great category but the way it breaks down by price is getting blurred in the second tier.
Q: Is Sumitomo impacted by this trend?
A: We definitely have been because between 1999 and 2008, we were one of the dominant players in ultra high performance. But that was defined by what I'll call aftermarket performance. So our strength in true ultra high performance is very small right now. And until we bolster our OE applications, it will continue to be a less and less important part of our business.
It doesn't mean we don't sell a ton of them, because we do. But we do not sell a large quantity of ultra high performance summer tires. If we talk about the traditional ultra high performance tires that go on BMWs and all these things, we definitely get a large segment of the marketplace, but we don't necessarily call that ultra high performance anymore. That's really grand touring.
Q: What does Sumitomo want to focus on?
A: We want to grow with the whole of the market. We have no interest in being specialists in one given category. Ten, 15 years ago that was our endeavor, but now that we do not have restrictions on our Falken brand in North America, our goal is to be a meaningful brand in every segment, not one specific segment.
And the reason for that is, in order for our regional distributors to do well with our products, we need to sell in trailer-load quantity, and we need to be able to capture 80, 90 percent of the market demand with a brand so the dealer can rely on us.
Which means great HTs, great all-terrains, great medium truck, great high performance, great grand touring. It means that in all those segments we need to have good products.
Furthermore, as the market changes, we don't want to be held to any one segment because if the market changes in that segment then we'll be at risk. And that's essentially the greater overall story of the Falken brand is our regional distributors are beyond double-digit growth for the last two years running now and it's because our dealers can buy us and sell successfully in every segment, not just ultra high performance.
And because of the consolidation in the marketplace among distribution, the brand that has the best breadth of product in every segment and the cleanest distribution model becomes the most valuable to the regional distributor.
Q: Have the tariff increases impacted your business?
A: Right now we'll call it noise, again. Ironically it has allowed the third tier to take price increases with distribution because they can raise their prices so long as it's less than the net of the increase.
What impact is it on Falken brand? Very little because we actually do not sell a lot of products in the third-tier price zone. We do offer Ohtsu, but the Ohtsu price does not compete with third-tier imports that were impacted by tariff changes. But we don't believe tariff changes are going to make significant shifts in the distributors' business because they've already seen the tariff cycle and its impact on their business, so most dealers recognize that tariffs come and go, and you have to buy that product understanding the risks.
We know that dealers see that business as less reliable and less stable; dealers need stability and reliability. Those are the two most important things because the independent tire dealer can sell tires regardless. But its impact on the Falken brand and Sumitomo North America is negligible.
Q: Have you seen any impact of the federal tax cuts?
A: At this point in time that is the type of noise that goes to the marketplace, and that's the type of noise that rarely actually makes an impact on the consumer in the here and now.
Does it affect consumer confidence? I'm sure it can but I have yet to ever see the tire industry convey that type of information. Those pieces of information, I would call tire business rhetoric.
That's the thing tire CEOs and executives use to explain why they're having problems in the marketplace, but the fact of the matter is unemployment — everybody is working — unemployment is 3.8, 3.9 percent, the population has cash flow, and as long as they're driving, tires will be purchased.
Q: Any plans for investments for the rest of the year?
A: Our largest investments are already under way, and that's our focus on our Buffalo (N.Y.) facility. That is purely incremental production for us and that's domestic light truck and medium truck. So it's a huge windfall of capacity.
We just have to make sure that we execute on our transfer plans so that our dealers don't see any disruption in service. And right now we have a very robust demand from our dealers, so the additional capacity is very beneficial. We just need to do the best job possible of aligning our demand and that new capacity in order to take advantage of the momentum that we have in the marketplace.
Q: Do you foresee tire price increases in the second half?
A: Falken took a price increase in January and then one in May. We've done that not as a result of materials but simply as a result of the relative price of our brand and where it needs to be in the second tier.
And that price increase was, to be honest with you, a response to what we will call the volatility and the lack of discipline with the rest of the second tier, primarily Korean brands, and we needed to stabilize our brand among our distributors, so the price increase did that for us.
If we look at the quarterly results of Goodyear and Cooper, both of them spoke to raw materials having an impact on their returns. Cooper posted 75 percent less profitability than the previous quarter.
Our belief is price increases are more than likely imminent but unfortunately the forecast or the tire manufacturers association shipment results compared to last year, leave executives pessimistic and so they are probably fearful to take an increase.
Q: Do you foresee raw material prices stabilizing?
A: If we look at the last 52 weeks, as they've come down from the second quarter of last year, they've been very stable. At this point we do (expect them to stay stable).
Q: What are some of the challenges for the tire industry going forward?
A: It's simply going to be distribution planning. How we adjust our distribution model to make sure there's uninterrupted tire flow to the independent tire dealer is the paramount subject. And right now we have a very healthy mix between independent dealers, national retailers and national distributors, but if any portion of our, or any other brand's, three-prong approach stumbles, those are very large moves that company will have to make. So unfortunately the biggest changes we will probably have to deal with we won't know about until the day we read about it in the news.
Q: What advice would you give to dealers trying to maneuver through these changes?
A: Our advice to the independent dealer is to do exactly what they see Falken Tires do, and that is Falken Tires has recognized who its ultimate customer is. And our ultimate customer is not actually the consumer. Falken Tires' ultimate customer is the independent tire dealer.
The independent tire dealer's ultimate customer is the consumer. That is why you see us step away from Major League Baseball, national advertising because we believe the power is held with the dealer who sells to that actual consumer, period. That's the end.
Therefore, every resource we have needs to be devoted to that independent dealer so that independent dealer has the resources to effectively market to that consumer because the independent dealer is going to compete against larger national players with more resources.
Thus, the independent dealer needs to be aligned with a brand that gives him tools to be effective in his competitive endeavors. And that is why everything from the introduction of our Falken Academy, bringing 4,000-8,000 dealers here to our home office to visit us and build that relationship, to our Falken TV initiative, all of our efforts aim to grow our associate dealer base. Every asset that we have is pointed to the independent dealer.
And if the independent dealer wants to be aligned with a reliable competitive brand, we believe our brand is in one of the best positions in the second tier.
What he doesn't need are brands he sells that are sold in every location possible with prices that don't allow him to make any money. That's what he doesn't need.
Because the consumer does not care about all this tire business noise. They simply own vehicles, they want to go to work, and they want to pick their kids up from school. That's what they want.
