Tire makers losing money and patience / Who will supply tires for the next vette?

Tire makers losing money and patience

Carmakers, suppliers clash over price cuts
June 3, 2002






BY CAROL WOLF
BLOOMBERG




Goodyear Tire & Rubber Co., Michelin and Bridgestone Corp., the biggest tire companies, plan to increase profit from sales to automakers after more than a decade of price cuts and money-losing contracts.

France's Michelin, Europe's biggest tire maker, and General Motors Corp. terminated a European agreement this week after Michelin refused the automaker's price demands. Goodyear, North America's largest tire company, said contracts with GM are "clearly unsatisfactory and unsustainable."

GM, Ford Motor Co. and DaimlerChrysler AG are asking for annual price cuts of as much as 5 percent from suppliers to compete with their rivals in Japan, Korea and Europe. Tire makers say they aren't budging and are threatening to stop selling some lines to car companies.

"The final leverage for suppliers is to leave," said Win Murray, an analyst for Columbia Management Group.

Suppliers have challenged automakers in the past without much success.

Robert Bosch GmbH, ArvinMeritor Inc. and Federal-Mogul Corp. refused carmakers' request in 2000 to reduce prices.

Chrysler Group got the majority of its suppliers to meet its demands for a 5-percent reduction, Wolfgang Bernhard, chief operating officer of the unit, said in January. The outcome of the dispute among other automakers wasn't immediately available.

Spokesmen for GM, Ford and DaimlerChrysler declined comment.

Goodyear, Michelin and Bridgestone lost an average of about $1.90 on a $38 tire sold to a carmaker, said David Bradley, an analyst with J.P. Morgan Securities Inc. That tire, sold through a retail auto-supply store for $50, could make the tire maker a $2.50 profit, he said.

Some tire models sold to automakers are more profitable, including those made for luxury cars, sport-utility vehicles and trucks.

Akron, Ohio-based Goodyear's operating profit margin, a percentage of sales minus the cost of goods, fell to 1.97 percent last year from 8.9 percent in 1997, according to Bloomberg data.

Chrysler gets about 60 percent of its tires from Goodyear, 35 percent from Michelin and 5 percent from Bridgestone. The three tire makers accounted for $42.4 billion of $69.9 billion in sales industrywide in 2000, analysts said.

Goodyear will slash sales in the next three years because of declining profit, Chief Executive Officer Samir Gibara said in February. Goodyear sells about 25 percent of its tires to carmakers and the rest through retailers, such as Pep Boys, Sears, Roebuck & Co. and its own stores.

Firestone, the U.S. unit of Tokyo-based Bridgestone, plans to reduce sales to automakers to about 30 percent of total revenue from 40 percent, said Christine Karbowiak, spokeswoman for the Nashville, Tenn., unit. The change will take place over the next two to three years because of existing contracts, she said.

"We're looking for a more profitable business mix," she said. "Contracts with the automakers have to be good for both parties."

Tire makers may have some leverage to raise prices after a recall of 10 million Firestone tires since August 2000. Made for the Ford Explorer, the tires have been linked to 271 deaths, which has increased consumers' concern about quality and safety, Murray said.

"Consumers now know tires can kill you," Murray said. "In the consumer's mind, price now equates to quality, which equates to safety."

Tire companies in the past accepted automakers' terms because they counted on future sales to the car buyer. In the past, almost half of customers replaced their tires with the same brand, a number that has dropped to 30 percent, J.P. Morgan's Bradley said.

The tire makers also took what the car companies offered because they wanted to maintain production levels. The companies have since closed factories and slowed production, said Lawrence Creatura, who helps manage about $2 billion at Clover Capital Management Inc.

Such changes and the tire makers' increasing focus on selling through Pep Boys and Sears could help the companies negotiate with the carmakers.

"It would be silly for tire makers to attempt this if they didn't believe they could pull it off," Creatura said. "It would hurt their credibility in future contract negotiations."