Understanding price increases in the tire industry – Part 5
In the fourth installment of this series, we discussed how global auto sales have directly impacted the price of tires. The demand for automobiles in emerging markets including China, Japan, and Brazil continues to rise. In order to keep pace, vehicles are being produced at an all time high rate. This year-over-year growth has led to a sharp increase in tire demand. When demand increases and supplies are strained, this generally leads to higher prices.
Over the last three years tire prices have increased an average of 70%. According to Tire Review, “we are seeing twice-annual tire price increases, and these are ranging from 5% to 12%.” In other words a tire that was $100 at the beginning of 2009 is probably listed around $170 today. From 2005 to today “the same tire costs about 87 percent more.”
Explosion of Tire Sizes and Options
Many years ago, there were three options
for tires. If you had a compact car, you stuck with 13”
tires; a mid-size vehicle would generally be outfitted with 14”;
and a full-size vehicle would go with 15” tires. This limited
selection meant that tire manufacturers could mass produce these
tires at lower costs. It also meant that tire dealers only
needed to stock a small number of tires, therefore not incurring
large inventory and overhead costs.
According to the Tire & Rim Association, “in 1977, 10 tire sizes covered 89 percent of the market. From 2003 to 2008, the number of tire sizes increased 42 percent to 519 sizes for cars and light trucks.” This infusion of tire sizes on the market is a result of drivers’ preference for large, high-performance and low-profile tires. In fact, according to 2011 statistics from the Rubber Manufacturers Association, 40% of all new vehicles in the US ship with performance tires (speed rating of H, V, or Z) as original equipment.
New vehicle designs now make use of larger diameter tires, not the old 14 or 15-inch but 17 and 18-inch tires. This is true even on smaller and mid-sized sedans as well as SUVs. These tires have higher performance ratings and lower mileage ratings, which not only means they’ll cost more but also need replacement more often. As we’ve discussed high performance tires wear very quickly, some as fast as 15,000 miles.
In fact, the tire market has gotten so specialized, that some tire sizes are almost exclusive to certain vehicles. For example, the Dodge Journey ships with 225/55R19 tires from Kumho. If you are looking for replacement tires for this vehicle, Kumho is the only company who makes the 225/55R19 tires. There may be other compatible tires for the Dodge Journey, but they will have slight size differences (ie 235/55R19). Other vehicles which utilize exclusive tires include the Toyota Siena SE, Toyota Forerunner LTD, and the Honda Fit. Perhaps you have already experienced these tire replacement restrictions?
Today the tire
industry has become highly customized and
competitive. According to a report from
Modern Tire, the most popular Original
Equipment (OE) sizes today are far different from the most popular
replacement sizes being sold. This creates logistical issues
for dealers who need to stock a wide variety of specialty tires in
multiple sizes. Furthermore, smaller production runs from the
tire manufacturers translates to higher unit costs. They are
no longer able to take advantage of economies of scale.
Tire proliferation and the subsequent inventory issues are a real challenge today. Tire dealers strive to maintain an adequate selection of tires without overstocking. Managing these larger inventories generally comes with a cost. In summary, we can see the trickledown effect of introducing more tire sizes into the marketplace – it clearly impacts the price of tires.