Tariff on Tires to Cost Consumers

In the September 14, 2009 Wall Street Journal article "Tariff on Tires to Cost Consumers," Timothy Aeppel reports on a trade war between the U.S. and China in the market for tires:

Consumers who buy low-price Chinese tires — the bulk of the tires China exports to the U.S. — will be hit hardest by the new tariff, as shortages in this market segment cause retailers to scramble to find alternative sources in other countries.

The tariffs, which apply to all Chinese tires, will cut off much of the flow of the more than 46 million Chinese tires that came to the U.S. last year, nearly 17% of all tires sold in the country.

The low end of the market will feel the impact of the tariff most, as U.S. manufacturers, who joined the Chinese in opposing the tariffs, have said it isn't profitable to produce inexpensive tires in domestic plants.

"I think within the next 60 days you'll see some pretty significant price increases," said Jim Mayfield, president of Del-Nat Tire Corp. of Memphis, Tenn., a large importer and distributor of Chinese tires. He estimates prices for "entry-level" tires could increase 20% to 30%.

Low-end tires cost roughly $50 to $60 apiece, while premium tires can sell for $200 to $250.

It will take many months for producers in places like Indonesia and Brazil to pick up the slack. And any tire manufacturer that wants to get involved in the low-end business would have to revamp factory lines to produce the sizes and types of tires favored by U.S. consumers, a costly and complicated process.

There could also be shortages, Mr. Mayfield said, as existing supplies run low and importers have trouble finding alternative sources. Many importers stopped placing orders for Chinese tires several weeks ago, fearing they might end up ordering tires that would carry a hefty tariff by the time they arrived in U.S. ports.

The tariffs won't just hit Chinese producers. Both of the U.S.'s remaining domestic manufacturers — Goodyear Tire & Rubber Co. and Cooper Tire & Rubber Co. — make tires in China that they sell in the U.S. Cooper this year is on track to import 2.5 million tires that it made in China. It was planning to boost that to four million next year.

Most of the tires coming from China are sold under private-label names and little-known discount brands. Many of these tires are sold through large retailers and national auto chains.

While China mainly exports tires at the low end of the market, it does export tires at all price points, said Robert Purcell, chief executive officer of Purcell Tire & Rubber Co. in Potosi, Mo., which has 70 outlets selling retail and commercial tires. He said Chinese producers appear to be steadily moving toward selling higher-price tires as they and foreign companies invest in new technology in China.

Rod Lache, an industry analyst at Deutsche Bank Securities, said the tariff is hitting at a difficult moment, which could compound turbulence in the marketplace. Inventories are low, he said, as companies have reduced stocks in the face of the recession.

Meanwhile, a massive reduction in capacity is taking place. In 2005, North America had the capacity to produce 370 million tires. Today, that number has been cut by more than 40 million — and a further 35 million are in the process of being eliminated.

"And now demand is starting to creep back up," Mr. Lache said.

Write to Timothy Aeppel at timothy.aeppel@wsj.com