Back orders on the horizon
For those of you wondering why it seems like more truck tires are on back order lately, consider the facts over the past 12 months. Last year at this time, worldwide economic conditions were close to an all-time low, which resulted in tire manufacturers cutting capital expenditures in 2009 by almost 50%. Flash-forward just a few months, and freight was up with huge gains in demand for new trucks, a trend that has continued throughout the year. Nobody thought the trucking industry would rebound so quickly at so many different levels, which means the tire companies are caught in another precarious situation.
A few years ago, the earthmover tire industry experienced a severe shortage of large tires that reached the point where millions of dollars worth of new haul trucks sat on blocks at the factory waiting for tires. Operators were so desperate for replacements that they dug up scrap tires so they could be repaired and keep equipment in service. Presses were working 24/7 and ground was immediately broken on new plants to create additional supply — and then the global recession hit like Hurricane Katrina. In almost the blink of an eye, the original equipment and replacement markets reversed direction and the shortage became ancient history. Since the recession ultimately affected all types of tires, plants were closed and global production capacity was reduced by around 50 million units overall.
Tire manufacturing is unique in the sense that if a company is set to produce 50,000 tires, then it will order the materials and schedule the press time to build 50,000 tires. It's not like the company can send a memo to each of its plants halfway through production and say, "switch everything from 295/75R22.5 trailer tires to 11R22.5 drive tires right away." The differences between a trailer tire and a truck tire may be fairly significant from a raw material standpoint, so the inventory cannot always be transferred over to a higher priority size and/or type of tire.
It's also important to note that dramatic (or unexpected) increases in new truck and trailer sales have historically contributed to tire shortages, with or without a recession. Most tire companies rely on OEM contracts to keep the presses working, but the penalties for failing to supply the production line can be severe. If new trucks are in danger of sitting at the factory waiting for tires, two things are going to happen: One, any new tires in production will go straight to the OEM; and two, the replacement market will have to wait. I've been in this business for almost 30 years and it never fails; if new-vehicle sales are up when compared to the previous year, new truck tires become harder to find.
I'm not trying to make excuses for the tire companies because I still have a hard time accepting some of the reasons for back orders. However, I must acknowledge that the new economy and lessons learned from past experiences mandate a more conservative approach because a full warehouse is much worse than an empty one. In a perfect world, the forecast is on the money and new production is scheduled to come on line just as inventories start getting low. But we know the world is far from perfect and while there may be tremendous demand today, it can make a 180-degree turn in one afternoon of selling on Wall Street. The stakes are too high to get overly aggressive when it comes to production, so the supply and demand cycle will remain volatile as long as the economy is unstable.
Kevin Rohlwing can be reached at [email protected]
