China's Prices Undercut U.S. Tire Makers, Causing Plant Closings

[Massillon, OH] -- Rapidly rising imports of tires, especially from China, are increasing pressure on American tire makers to close more plants and cut domestic production.

Passenger-tire imports, which have been steadily increasing every year this decade, topped the 100 million mark in 2005, with Chinese imports up 47 percent from 2004. And while imports have climbed 38 percent since 2000, U.S. tire output has been steadily decreasing year by year.

The trend is expected to continue, given the low cost of tires made in China and tire-making costs in the United States, said Saul Ludwig, an analyst at KeyBanc Capital Markets in Cleveland.

"Imported tires, particularly from China, are much lower cost than imports from any place else," Ludwig said.

Passenger tires imported from China last year had an average cost of $25.23, while a passenger tire from Canada cost $38.67, a tire from South Korea $37.58 and one from Japan $48.29.

Ludwig said that nearly all these imports are going to the replacement tire market, with very few sold to domestic automakers for equipping new cars.

This import trend hovers over contract negotiations between the United Steelworkers union and major domestic tire makers including Goodyear Tire & Rubber Co., Bridgestone-Firestone and B.F. Goodrich, which is part of Michelin of France. Companies want to cut costs, while the union seeks to preserve wages and benefits, and prevent further erosion of production and jobs.

Passenger tire production in the United States has fallen from 223 million tires in 2000 to 176 million in 2005, a drop of 21 percent, Ludwig said. The union is facing another round of plant shutdowns, due partly to the rising imports and a sluggish tire market.

While tire import levels held steady for the first six months of 2006, industry sales of passenger and light-truck tires fell about 7 percent. Industry observers said consumers are postponing replacing tires as they struggle to pay higher gasoline prices.

At the same time, Goodyear and other tire manufacturers have been raising prices to cover the soaring costs of oil and other raw materials.

The 7 percent drop is highly unusual for the North American replacement market. Robert Keegan, chairman and chief executive officer of Goodyear Tire & Rubber Co., said the market has been down by 3 percent or more only in four of the last 50 years. Keegan said consumers are buying fewer tires per store visit and driving fewer miles per vehicle. He also said technicians are noticing less tread depth remaining on tires being removed from cars.

Announced or potential closings include:

Continental Tire will halt production indefinitely at its plant in Charlotte, N.C., ending jobs for most of the 1,000 union workers there. The German company also said it was shutting down the remaining operations at its tire plant in Mayfield, Ky. -- a factory that once employed 2,400.

In June, B.F. Goodrich said it would cut output 30 percent to 40 percent at its Opelika, Ala., plant, which has the capacity to make 8 million tires a year.

Bridgestone-Firestone has said it will close its Oklahoma City tire plant by the end of this year. It said the plant, which employs about 1,200 hourly workers, is not competitive in the global marketplace and is suffering from substantial losses.

The industry is bracing for another potential shutdown as Goodyear follows up on its recently announced plans to reduce its private-label tire business in North America by a third, or by about 8 million tires annually.

Ludwig said he would not be surprised to see additional closings, "one for sure, maybe two," as the production cuts are made.

Private-label tires -- which are made in major tire plants such as Goodyear's but sold under a different name -- appeal to price-oriented consumers, and sellers are using low-cost imports to offer greater value to consumers than if they bought domestically produced tires.

In addition, Cooper Tire & Rubber Co. has shifted manufacture of medium truck tires from its Albany, Ga., plant to China. Cooper, which is the fourth-largest tire producer in North America, soon will start up a plant in China that will be owned by Cooper and Kenda Rubber Industrial Co. of Taiwan. The plant is expected to eventually produce 10 million to 12 million tires a year, all for export to other countries for the first five years it operates.

To keep jobs in this country, the United Steelworkers union is pinning its hopes on the growing consumer demand for larger and more specialty-type tires -- the higher-margin kind used in SUVs and other high-performance vehicles, as well as tires built from specialty materials for added safety, a more comfortable ride, increased vehicle stability, fuel economy and other features that help persuade consumers to pay more money.

"We don't want them to take this high-value work out of the country," said Wayne Ranick, a spokesman for the United Steelworkers.

The union is urging the tire companies to spend more on automated equipment for faster changeover of production, so plants can more efficiently produce a wider range of sizes and premium-priced tires.

When the old United Rubber Workers merged with the United Steelworkers of America a decade ago, the union had more than 98,000 rubber workers, but now it has less than a third of that number -- about 30,000 -- who work in tire and rubber plants in the United States.

With tire factory wages in the United States around $22 an hour, versus 73 cents an hour in China, KeyBanc Capital Markets' Ludwig does not see much chance that the rapid growth of tire imports from China will end soon.

The gap could be narrowed eventually if the pace of industrialization in China forces wages up there or if China raises the value of its currency. In the meantime, imports will continue to be a major challenge for domestic tire plants.

"The gap has to be closed," Ludwig said, "whether their costs go up or our costs go down."

Aug. 8, 2006(Thomas W. Gerdel is a reporter for The Plain Dealer of Cleveland. He can be contacted at tgerdel@plaind.com.)

There can be a trade deficit (X>M) in equilibrium under a floating exchange rate but it is not the same thing as a trade deficit under a fixed exchange. Under the former the excess supply of dollars causes the exchange rate to fall until a new equilibrium is reached. Under the latter the outflow of gold/specie reduces the money supply within the country causing income to fall, prices to fall and imports to follow. Exports will increase because the domestic price level deflates.

Yey! You've got it straight now! That's a nice, succinct description. Could not have said it better myself. :)

I don't see any necessary reduction in the money supply due to the deficit in the first case as there is in the second.

You're correct.

You describe the BoP deficit occurring if the authorities intervene to prevent the dollar from devaluing. How is that any different from saying that there is no deficit under a true floating exchange? Never mind, I meant to say BoP deficit earlier and said Trade deficit.

Exactly right. Didn't I tell you earlier that you had the BoP and trade deficits mixed up? I'm glad to see we're not the same page now! :)

Heller defines "the balance of payments as the difference between the quantity of dollars demanded and supplied in international currency markets."

Yes, that's a good definition and it is equivalent to the one I gave you earlier, though described in different terms. If the capital account and current account don't balance (my definition), then you must have either excess supply or excess demand for dollars.

Under floating exchange rates, you by definition can't have excess supply or demand for dollars, since the exchange rate will so that demand=supply. The same mechanism ensures that the capital and current accounts balance.

The first description I ever heard (from my econ professor)of a practical use for econometrics was of a student who used one variable to predict electricity demand. His finding was so robust that Commonwealth Edison hired him before he even graduated.

I don't know the case, but I guarantee you that he didn't just estimate a single variable regression. To establish a robust relationship, you have to throw in all other plausible variables to ensure that the one being tested is what's driving things and not something else with which it is correlated.

It is not often that I get to discuss economics from a theoretic perspective and I appreciate it when things do not come out the way they are intended are challenged so that they can be corrected. Unless I am very careful things can come out the exact opposite of what I mean since we are often speaking of things going up or down so you say up when you mean down.

Econometrics is even less often discussed and I have done none in over 30 yrs so can easily screw that up.

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