Construction tire market braces for slowdown

As U.S. construction market growth is expected to slow down in 2020, tire dealers should increase their role as consultants to their construction customers who are striving to eke out the most from their equipment.

"At the end of the day, everyone's going to be looking at where is the best use of their money when it comes to their machinery and their tires," according to Bruce Besancon, vice president, off-the-road sales, Yokohama Tire Corp., who said the construction market in North America, which is tied to housing starts and gross domestic product, fared well last year.

The OE construction tire market declined 3.8 percent in 2019, while tire replacement in infrastructure rose by 2.4 percent through November 2019 versus 2018, according to Michelin North America Inc.

"The year got off to a great start but slowed down in the second half," said Paul Hawkins, Titan International Inc.'s senior vice president, aftermarket sales, North America. "Overall, we were flat to down slightly versus 2018. On the OE side, a November 2019 report showed a 14 percent decline in construction vehicle turnover versus a year earlier, which has an impact on our business."

"We expect the construction industry to remain stable in 2020," said Tim Netzel, marketing director, off-the-road, U.S. and Canada at Bridgestone Americas Tire Operations.

"In this segment, we have seen positive trends in spending, with nearly 156,000 jobs created in the last year alone, according to the Associated General Contractors of America. Additionally, pending infrastructure reform could drive a stable construction industry for the foreseeable future. We expect this stability to translate to the tire market, as well."

Dodge Data & Analytics L.L.C., in its 2020 Dodge Construction Outlook, predicts that 2020 U.S. construction starts will slip 4 percent from the 2019 estimated level of activity.

"The recovery in construction starts that began during 2010 in the aftermath of the Great Recession is coming to an end," Richard Branch, chief economist for Dodge Data & Analytics, declared.

"Easing economic growth driven by mounting trade tensions and lack of skilled labor will lead to a broad-based but orderly pullback in construction starts in 2020. After increasing 3 percent in 2018, construction starts dipped an estimated 1 percent in 2019 and will fall 4 percent in 2020."

Branch said that while economic growth is slowing, it is not anticipated to contract this year. So while construction starts will decline, the level of activity will remain close to recent highs. The dollar value of starts for residential buildings will slide 6 percent, while starts for both non-residential buildings and non-building construction will drop 3 percent.

According to the Dodge report:

• Single-family housing starts are expected to dip 3 percent in 2020. Affordability issues and the tight supply of entry-level homes have kept demand for homes muted and buyers on the sidelines.
• Multi-family construction experienced eight years of growth since 2009, however, multi-family vacancy rates have moved sideways over the past year, suggesting that slower economic growth will weigh on the market in 2020. Multi-family starts are predicted to drop 13 percent in dollars.
• The dollar value of commercial building starts will fall 6 percent in 2020. The steepest declines will occur in commercial warehouses and hotels.
• The dollar value of manufacturing plant construction will slip 2 percent in 2020, following an estimated decline of 29 percent in 2019 due to rising trade tensions, suggesting the manufacturing sector is in contraction.
• Recent federal appropriations have kept funding for public works construction either steady or slightly higher—translating into continued growth in environmental and transportation infrastructure starts.
• Labor shortages plague the industry, and the impact of tariffs continues to be felt, despite a slight drop in the levels of concern about material and equipment prices and availability.

Despite the slowdown, construction companies are expected to continue investing in equipment, according to the Equipment Leasing & Finance Foundation.

Credit market conditions remain broadly healthy, the foundation said, noting that financial stress remains subdued and credit supply, while slightly tighter, still is not a cause for concern.

"However, demand for credit—especially by businesses—has weakened notably, which may portend a further slowdown in business investment in 2020," the foundation said.

After decelerating over the course of 2019, the U.S. economy appears poised to soften further in 2020. Equipment and software investment is on track for its weakest year of growth since 2016, weighed down by an annualized contraction in the third quarter—the first negative reading in over three years, the foundation said.

Several headwinds highlighted in last year's annual outlook began to stunt growth in the second half of 2019 and are expected to continue dragging on business confidence and investment in early 2020, the foundation said.

"Overall, we expect the economy to grow 1.7 percent in 2020 (down from an estimated 2.3% in 2019), while we project that equipment and software investment will expand 1.1 percent (down from an estimated 3.6 percent in 2019)."

Meanwhile, the Association of Equipment Manufacturers said late last year it expected the U.S. construction market to have grown 3.3 percent in 2019 and should expand by 1.7 percent in 2020 and between 1.5 percent and 2 percent a year for the next five years.

Residential construction remains a strong driver, according to Benjamin Duyck, AEM's director of market intelligence, as it represents about 40 percent of the total market. However, growth has slowed considerably lately.

"A lot of the optimism we saw in 2017 and 2018 seems to have evaporated," Duyck said during the association's Thinking Forward event last year. "There really is no consensus to what the future truly holds."

Tariffs are playing a role in the uncertainty, as is the need for a new comprehensive infrastructure package, the AEM said, adding that while the outlook for construction remains positive, there are enough factors with negative impact that are causing uncertainty going forward.

"2019 has been a solid year for the economy overall, as well as the ag and construction sectors. A number of factors—global trade wars and protectionism being chief among them—are leading to increased concern that a recession is right around the corner. And while that likely isn't the case, it's not unreasonable to suggest one may arrive by 2021," the AEM said.

Market trends

As has been the case for years, construction companies are concerned with getting more life out of their machinery, according to Besancon.

He said he has seen some movement toward lower-profile tires on some loaders, a change that provides a larger rim diameter offering OEMs more room to put in additional braking and cooling features.

Construction tires are lasting longer, compared with 20 years ago, "and that comes from the tire manufacturers getting better, as well as the machinery in the interaction with the tire being much more studied and involved," Besancon said.

"I think there is much more of a honing of the tire to the machine than there used to be years ago. It's not just, 'find the right dimension of the tire and put it on.' It's 'Let's design these things around what the tire capabilities are and the tire design around what the machinery has to do.'

"We've gotten into a much more sophisticated level and I see that doing nothing but increasing over time as well."

He also noted that construction sites are using smaller, compact machines—such as skidsteers, telehandlers and backhoes—with smaller tires, because they are more maneuverable and versatile for conducting finishing work.

"There has been a steady growth in CTL (compact track loader) machines and mini excavators," added Justin Brock, B2B construction segment operations manager for Michelin North America.

To take full advantage of this growth, he said, Michelin in 2018 acquired solid tire and track maker Camso Ltd., "which represents a great opportunity to better service our customers."

Brock also noted other trends that will have an impact on tire dealers:

• Productivity advancements through digitalization and technology. "The construction industry has lagged behind many sectors, such as agriculture and manufacturing, in technological capabilities that influence productivity. This is starting to change. Many companies are now focused on services and equipment advancements. These advancements are making sites more efficient, safer, increasing productivity and putting all the knowledge in the end-user's hand," Brock said.

"It's all about getting the data in an easy-to-use platform to help the construction companies increase the productivity/uptime of their equipment and operation. This allows you to monitor the performance and analyze detailed equipment and tire information."

This technology trend will impact independent tire dealers as their customers will expect more than just tires.

"Servicing and data interpretation will continue to grow," Brock said. "Dealers that incorporate these solutions into their offering and utilize these technologies and data to bring value to the customer will differentiate themselves in the market."

• Equipment rental is growing in the construction market. "This could affect the purchase of the tires as the customer no longer owns the machine. This could increasingly shift the purchase decision from the end-user to the rental company," Brock said.

Since the Great Recession of 2008, there has been industry resistance to buying and maintaining large fleets of equipment that carries a substantial financial burden and risk, according to Camso.

"Since then, the growth of the rental market has even exceeded the growth of the general economy. The construction market may be better than it was last decade, but the mindset of letting someone else take on the ownership costs and depreciation of capital assets has persisted and will continue to," Camso said.

• The construction market, like the vehicle service aftermarket, is facing challenges in recruiting and retaining skilled equipment operators and service technicians.

Containing costs

Besancon said that tire makers' and dealers' goal is always: How do we make a tire that lasts longer and is more durable?

He noted that some construction machines work in different applications and on various ground conditions so tire companies have to develop tires that will adapt to those applications.

"There is a big push in the construction industry toward optimization and getting more out of the machine," Brock said.

"This includes OEMs looking at autonomous equipment, electric machines and more connected equipment, just to name a few.

"The game is changing in all aspects. Because of this, the task for tires is also starting to change. OEMs are starting to look at tires that have reduced rolling resistance and reduced fuel consumption to name a couple.

"Tire manufacturers, like Michelin, are constantly innovating products for tire performance," he said. "The premium solutions optimize the fleet performance and deliver optimal results. By constantly studying tire performance, tires are engineered to deliver performance through tire durability, casing, tread design as well as tire compounds and materials. Performance is delivered through safety, traction and longevity."

"It really all comes down to efficiency and productivity," Netzel added.

"More than ever, the need for efficiency in the construction sector is driving demand for technology-based solutions to help maximize resources to better manage the job site. In fact, 80 percent of construction industry professionals today say mobile technology is a top priority for the efficiency of everyday operations. Remote machine monitoring will likely become the standard rather than a recommendation, and data and telematics will continue to modify mining practices for increased uptime."

Camso noted three technology trends that it said will impact construction equipment in the near future:

• Autonomous construction equipment operated remotely, or even without an operator.

"Tire and track technology is critical in these operations because getting a flat tire or unexpected downtime just cannot happen. Flat-free solutions like solid tires and tracks are trends we already see in the construction industry today, and it will become even more of the standard in the future," Camso said.

• Smart technology that will allow different machine components to communicate with each other, further enhancing telematics and predictive systems.

"The key questions Camso is addressing right now are what kind of information is valuable to collect, how do we collect it and finally, how do we use and share it," the company said.

"Using embedded sensors and other resources, the possibilities are endless for construction equipment functionality. In our area of specialties, we see large earthmover tires helping to make adjustments to the way a machine is operated by tracking operating hours, air pressures and temperatures. Using that information, operators and fleet managers can make more better, quicker decisions to helping to reduce expenses and increase productivity."

• Increased fuel savings with machinery that is getting lighter and more efficient, helping to reduce operating costs without sacrificing performance. Fuel costs are a significant expenditure for most operations, according to Camso.

"In many sectors of the construction industry, we see a rise in electric and hybrid equipment. It's a trend that will continue to impact more segments of the industry as engineering knowledge and capabilities continue to grow.

"Developing products with a lower rolling resistance is key to achieving a lower energy consumption. Weight is also a big consideration. To achieve the required output of energy to lift, transport or dig, electric and hybrid equipment needed to be lighter. However, weight reduction could not come at the expense of performance, which means everything from the tires to other components of a machine need to reduce weight," Camso said.