Imagine you are back in 1985, and you are at the auto show (picture below) looking at all the new technologies all the auto manufacturers are showing off and compared to the current day vehicle, a lot of things have change. Invention of ABS braking, air bags & electric drive train are all of the things you might noticed over the years. However one thing still stays the same (at least from a visual point of view) which is the 4 black tires which the car is sitting on.
Since the invention of radial tires in 1970s, these black donuts have been a stable for the every road car out there in the market. In the foreseeable future, we could see that the combustion engines will be replace by an electric drive train but no matter what happen to the automotive industry we will still expect a 2050 car being paired with 4 tires. Even though if cars can fly, they still need tires for landing and take off. Hence I see tires as a critical product in the automotive industry for many decades to come.
So knowing this, would it be worth investing in tire companies? They are actually 2 main markets for tires. Lets look into them closely below:
Table of Contents
Replacement
The replacement market is where most consumers purchase their tires normally. When your tires goes bald or “botak” you will head to your nearest tire store and replace them. (this is usually not always the case as most of the consumers do not even know what level of tread depth is sufficient. They rely heavily on the input during their maintenance service.) The more likely scenario is that you have a puncture and your instant thought would be to head towards a tire shop and get it repaired or purchase a new set of tires. So technically, the replacement market depends on the how much mileage the entire car population has used. The higher the mileage usage, the more worn out the tires will be, the more tire would be sold in the replacement market.
Original equipment (OE)
You might noticed that when you buy your brand new car it has already been equipped with tires. The tires supplied to the original equipment manufacturer is a totally different approach compare to the replacement business. Instead of having everyday consumer as your customer, the OE business have the car manufacturers as the customer. The requirements might differ compared to the replacement market as every car manufacturer have different focusses they want from the tire. As you can sense it right now, this segment is highly dependent on the amount of new vehicle sold. This is also more or less loosely tied the current economic conditions of the market.
Profitability
Lets have a quick look of the top premium manufactures profitability over the last few years to see whether the tire industry is really a money making machine?
Michelin
| (In € millions) | Sales | Segment EBITDA (1) |
| 2020 | 20,469 | 3,631 |
| 2019 | 24,135 | 4,763 |
| 2018 | 22,028 | 4,119 |
| 2017 | 21,960 | 4,087 |
| 2016 | 20,907 | 4,084 |
| 2015 | 21,199 | 3,934 |
| 2014 | 19,553 | 3,286 |
| 2013 | 20,247 | 3,285 |
| 2012 | 21,474 | 3,445 |
| 2011 | 20,719 | 2,878 |
| 2010 | 17,891 | 2,660 |
Michelin has a very good track record of profitability. Discounting the Covid impact, they had almost a steady increase in profit over the years while the average revenues are also up across the years. It sets the gold standard in the tire industry with an average yield of 17% over the last 10 years.
Bridgestone
| In € millions | Sales | EBITDA |
| 2020 | 23,645 | 2,618 |
| 2019 | 27,031 | 4,264 |
| 2018 | 27,623 | 4,599 |
| 2017 | 27,084 | 4,638 |
| 2016 | 25,789 | 4,927 |
| 2015 | 26,426 | 5,032 |
| 2014 | 29,319 | 5,327 |
| 2013 | 30,871 | 5,315 |
| 2012 | 31,917 | 4,646 |
| 2011 | 33,026 | 2,247 |
| 2010 | 26,442 | 3,115 |
As you would have expected in the tire industry, the former king of tires aka Bridgestone has been making money for the last 10 years. Bridgestone has an average yield rate of about 15% which is 2% less compared to Michelin. Bridgestone achieved really high yield during their golden years from 2013 till 2016 and has dropped every since. As for Covid 2020, Bridgestone also had a drastic reduce in profits with a drop of 60% compare to the previous year.
Goodyear
| In € millions | Sales | EBITDA |
| 2020 | 10,350 | 556 |
| 2019 | 12,386 | 1,369 |
| 2018 | 12,999 | 1,676 |
| 2017 | 12,917 | 1,865 |
| 2016 | 12,733 | 2,159 |
| 2015 | 13,812 | 2,004 |
| 2014 | 15,236 | 1,897 |
| 2013 | 16,414 | 1,764 |
| 2012 | 17,633 | 1,567 |
| 2011 | 19,124 | 1,573 |
| 2010 | 15,819 | 1,200 |
The 3rd biggest tire company in the world also has a profitable record for the last 10 years. Comparing against the previous 2 manufacturer’s its revenue is only roughly half of them. Goodyear has an average yield rate of 10% which is the lowest compared to the other 2 manufactures featured in this post.
So as you can see from the figures, the tires industry is actually a very profitable industry. It has proven to be quite resilient especially during tough economic times as the demand for tires are every present.
Raw materials
One thing to keep in mind in regards to the tire industry would be its dependency on some common commodity. Natural and synthetic rubbers forms the core ingredients which needs to make tires. At least from today’s perspective, there are no clear industry grade substitutes for these ingredients. So the price of natural rubbers which has it volatility depending on the weather and it is mainly produce by south east Asia countries As the raw materials of synthetic rubbers are derived from hydrocarbons, its prices are highly dependent on the market oil prices which at times could be also quite volatile. Most of the manufactures tend to raise prices to counter the offset in material prices. (The opposite is however not true :), I have not seen the prices went down because the material prices went down )There have been frequent tire price increases where the tire manufactures often quoting raw materials reasons. Based on this article, about 66% of the raw materials needed for tire production are heavily influenced by the oil prices.
Summary
Overall, tire business is a really profitable segment which has been consistently producing profits over the last 10 years. Challenges coming from the reduce OE volumes and also raw materials price fluctuation remains the key threat towards their profitability.