Who's To Blame For High Prices In The OTR Tire Markets?

By Kurt Hartman

Over the past two years, there have been alarming price increases in OTR(off-the-road) tire markets.

Everybody seems to have an answer: It's the manufacturer, the tire dealer, the gray market, the Chinese, global warming....the dog ate my tires.

I have my own opinion on all of this, and I blame everyone (and everything) but the dog (I don't own one) and global warming (which is just a natural temperature cycle that repeats itself every hundred years or so: this is a subject for another day).

Let's start with an obvious choice for blame: the Manufacturers.

The basic argument goes something like this: Bridgestone (Michelin, Goodyear, any name will do) should have seen third-world development coming, and increased their production capacity accordingly.

In addition, they caved to the demands of mines, and committed to tire allocation and price contracts that did not allow for any expansion in the markets.

This leaves the authorized dealer's for manufacturer product out in the cold, because the manufacturers, by-and-large, have not signed OTR allocation contracts with their dealers.

Then, to rub salt in the wound, each of the manufacturers raise pricing by 3-7% at will.

So who do the manufacturer's blame: The Dealers.

Now, this seems like a counterintuitive way to do business. Blame the people who sell your tires, give them very little of the product they demand, and then raise pricing arbitrarily.

Nevertheless, this is the manufacturer's argument. The dealers sell to and buy from the gray market. When you think about it, what other option do they have?

The manufacturer can't give you what you need, and has not committed to do anything of the sort. Somebody else has gone to the trouble of buying those tires for you, and charges you a premium for that service. You, in turn, pass that cost along to your customers.

What the manufacturers should be most worried about is the pricing that some dealers give to the gray market traders. Pricing that is marked up 50-250% above cost, starts gray market pricing at an artificially high level.

How much can you blame a dealer, really?

He has to include in his pricing profits that justify the risk of reduced allocation(by the Manufacturer) and risk losing his ability to sell all of their other products(including their passenger and light truck tires).

The Dealers argue that the ban on sales to the gray market puts them at peril, and if the risk of loss was not so high, that their prices would be more reasonable.

To make myself clear, only some dealers engage in these sort of sales practices, so it can only be a small piece of the problem.

So again, the Dealers blame the Manufacturers. Who do you blame next? The next guy in-line on the food chain. (Cue diabolical laughter) The Gray Market Traders. You can almost hear the barely contained rage when any manufacturer speaks about these people.

Who are they really? They are the children of Adam Smith, an enterprise born out of the necessity of the market to fill the need for supply.

What do they do? They find tires that the customer wants, and sell them to the customers that need them. Now, this seems like an easy task, but is made harder for a few simple reasons:

1.)Demand is greater(far greater, in some cases) than supply.

2.) Manufacturers are constantly trying to shut down the limited supply available.

3.)Many Dealers will not sell to the Traders.

4.)The prices quoted are not what a customer wants to pay.

How did these people get a bad reputation?

If you talk to a Dealer or a Trader, you will get more than a few answers, but the majority distill down to these:

1.)They quoted outrageous pricing. Usually these traders are to far removed from the actual tire seller to give reasonable prices. If you have to go through 5 people to get to the owner of the tire, you are not going to get great pricing.

2.)They didn't know what they were talking about. Anywhere there is profit, someone will jump on to make a fast buck. The OTR industry is not immune to this phenomenon. Dealers can suffer a high price from someone who is knowledgeable, but when someone who doesn't know a grader from a haul truck does the same, it rightfully makes them upset.

3.)Territories. The manufacturers have built up territories that protect the Dealers from poaching by other Dealers. When supplies were plentiful, this helped Dealers. Now, this can keep a dealer from making a sale. The dealers don't dare sell out of territory. Guess who tramples roughshod over territories, without fear of the manufacturers? If you said Traders, here's a cookie.

While neither Dealer nor Manufacturer will say it up front(although they might admit it privately), they need the Traders. Why? Well, despite the risks involved for the Dealer, there are high profits to be made by selling to the Traders. If you are a Manufacturer, who is going to complain about a 15% increase in price over the course of a year, when tires are being marked up 50-250% over invoice.

By selling to the Traders, both Dealer and Manufacturer exploit a clause that allows them to blow off warranty claims, warranties which are practically useless to the consumer due to numerous escape clauses in the fine print.

By blaming the Traders, both Dealers and Manufacturers can escape the scrutiny of the end user. In the 90's, the line was "It's the economy, stupid." The OTR Industry echoes with the unified call "It's the Gray Market, stupid. So who's left in this circle of pointing fingers: The Chinese.

Why is China such a threat? It isn't really, at this juncture. This is how the Manufacturers would like to keep it. The average Chinese OTR Tire at this time is laughable, and cheap. The engineering is poor, and Chinese tires are not made in the most popular flavor of OTR, radial.

Yet the manufacturers continue to engage in anti-competitive action against a small threat. Bridgestone, Titan(who owns Continental), and the United Steel Workers have brought suit against China for flooding the market with tires. Now, while this may be true, there is only one problem with this reasoning. OTR users will not buy Chinese tires. Well, except for the markets in Mexico, who run them because of the cost.

The Chinese have cut their own throats in this area. They brought a poor product to market, without adequate quality controls in place, and they evidently didn't bother to consult German or Japanese engineers. If they had done these things, the Big 3 (Bridgestone, Michelin, and Goodyear) might be slashing their prices. Right now they are ensuring that they don't have to in the future.

So why do I even mention the Chinese? If the Chinese ever get their act together, and produce a semi-reliable radial product, they could take a large share of the major manufacturer's business.

Who takes the lion's share of the blame in this? The free market. Not the gray market, the dealers, or even the manufacturers, not even the Chinese. - 29952

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