The business of tires is a business of slow change,
slow growth and low margins.
The total market value has remained around $50 billion
in the past few years, and it isn't expected to grow
much in the coming years either.
I mean, it grows a little faster than population, but
a lot slower than GDP.
So, you know, in some ways it grows slower than
toothpaste, much like the auto industry generally.
The industry is competitive and highly susceptible to
spikes in raw material costs, and a lot of buyers
treat its products as commodities, often not even
knowing the difference between one brand and
another. Price is usually the only differentiator, but
the future may look a lot different.
Some believe a real move to EVs will open up a whole new
realm of opportunity.
After all, EV tires cost 50% more and need to be
changed 20% more often.
The latest tires are engineered to tolerate an
EV's heavier weight and lightning quick
acceleration. More importantly, improve the
range.
If EV does kind of evolve and proliferate through the
car population like some think it may bring about
what I call the gold rush for tire manufacturers.
From 2017 to 2022, the US tire and rubber market grew
about 9%, and the top three tire makers account for more
than half of all tire sales in the country.
Americans bought 330 million tires in 2022, an
increase of less than 1% from five years prior.
Overall demand is expected to grow about 0.8% through
2027.
It's a low growth business, and it's a product that we
all take for granted to some degree.
So given that backdrop, um, tires are, uh, what I would
say amongst the most competitive businesses I
followed over the years.
The industry is highly exposed to raw material
prices, which companies have little control over.
Tires are made up mostly of rubber, fabric, steel, and
something called carbon black, which increases
durability and gives them their tar like color.
On the other side of it, tires are seen by many
buyers as almost like the very commodities they're
made of. NorthCoast Research's John Healy
estimates that as many as half of customers are
indifferent to which brand they choose.
Tire changes can't be forecasted with regularity,
either. Some people drive a lot, others less.
Other factors are the climate or region you live
in and unpredictable events like punctures.
When you take all these things, whether it's, you
know, the global nature of the business, the number of
operators and competitors, there are half of the
customer base that's kind of buying based on price
rather than brand.
And then the inability to kind of know when those
customers are going to come to you.
It just creates a dynamic that, you know, on January
1st, it's awfully difficult to know if your business is
going to grow 3% or if it's going to decline 3%.
One of the main ways that tire companies compete with
each other is by creating a differentiated product.
And how do you differentiate your product?
You try to make it last longer.
So in essence, the R&D that tire companies put into
their business is hurting their DNA over the long run.
It's slowing the frequency of replacement by having
tires last longer.
So it is a it is a really tough business.
Now enter EVs which pose whole new challenges.
We're very good at making tires for ICE, but EV is a
different a different animal.
At first glance, today's tire looks a lot like it did
150 years ago.
A mostly rubber tube inflated with air.
But a lot of innovation has taken place since then.
Michelin, one of the largest tire makers in the
world, created the radial tire in 1946.
Over the years, the rubber compounds, the materials
that are put in them have been changed radically.
That includes compounds that stay soft at colder
temperatures, allowing for hardier winter tires.
Today's tires are made of several types of material
adjustments to these different ingredients.
The types of compounds used, tread design, and so
on can tune the tire for different types of
performance. Racing tires, for example, are as slick as
possible. Consider the entirely treadless rear
wheels on a drag racer, allowing for a better grip
on the road. Tires like that can slip in wet
conditions. Most road tires have some kind of tread on
them, in addition to other tweaks to make them better
in bad weather. But treads slow tires down, hurting
performance, gas mileage or EV range.
Pull on one part of this, you give up on the other.
The real trick is to pull on several different ways.
EVs provide both challenges and opportunities in ways
that help distinguish tire makers from each other.
One interesting one EVs are a lot quieter than ICE cars,
a mixed blessing as it makes tire noise more
noticeable.
So you think about like the noise a basketball makes
when it bounces.
That's the air inside the tire ringing.
As you bounce, the basketball tire does the
same thing. It's got, you know, inflated air in it.
And as you go over bumps and do things, it can also
create that. What we see with some of the platforms
is that there can be a sensitivity to the way the
vehicle's designed with that frequency.
There are ways to reduce this, such as inserting foam
to dampen the sound.
Another challenge: extending battery range, an
EVs most precious resource.
Gasoline is still far, far more energy dense than a
typical EV battery.
You get a lot more pound for pound than a gasoline
car than with the current lithium ion battery
technology. The battery pack on the 259 mile range
Chevy Bolt weighs about 960 pounds.
The comparable gas powered Chevy Cruze can travel
nearly 550 miles on a single fill-up.
Its fuel tank holds 13.7 gallons, which weighs just
above 80 pounds.
Researchers are, of course, racing to change this.
While EV batteries don't store energy as efficiently
as gasoline does, EVs do deliver that stored energy
far more efficiently.
Only about 16 to 25% of the energy stored in a gallon of
gas will actually power the wheels, among other things,
a fuel burning engine loses about 65 to 72% of its
energy to heat, radiating off the engine and other
parts of the car.
EVs, however, deliver about two thirds of their energy
to the wheels more if there are energy recovery
technologies like regenerative braking.
Vehicles also lose energy through tires through
something called rolling resistance.
Basically, just a force that slows a tire down as it
rolls. The same force that would slow down and stop a
rolling ball.
Because EVs don't suffer energy loss through engines,
reducing that energy loss through tires has become
much more important to making EVs as efficient as
possible. Improving the tire can have a dramatic
impact on an EVs range.
We've done studies that have shown that you can impact
the range of an electric vehicle by as much as ten,
maybe even 15%, depending on your tire choice.
That means if a vehicle has 300 miles of range, you can
get an additional 45 just from using the right tires.
One key challenge, and the one that could be the
biggest boon for tire makers: EVs burn through
tires.
This might be the first thing from an auto market
development standpoint in decades that actually causes
tire demand to increase.
EVs weigh a lot more than comparable ICE vehicles.
The Kia Niro EV, for example, is about 20%
heavier than its Ice counterpart.
This isn't perfect, but a GMC Sierra 1500 pickup with
a turbo diesel engine has a curb weight of about 5,540
pounds. The GMC Hummer EV is almost twice that.
EVs also accelerate faster than Niro, with an engine
accelerates from 0 to 100km/h in about 10.4
seconds max.
The Niro EV does it in 7.8.
Many EVs can easily attain supercar levels of
quickness.
I'm sure you've had the opportunity to be in an EV,
and if you've driven with a friend in your EV or their
EV, one of the first things they're going to do is
they're going to hit the hit the pedal all the way to
the ground, and they're going to throw you back in
your chair, and you're going to be pretty
impressed.
This is because of torque, a measure of the power an
engine delivers to wheels.
Electric motors don't have the same constraints as
engines, so they can deliver torque very quickly,
essentially instantly.
That is what throws you back into your seat.
A car taking off like that will scrub the tires more as
they try to grip the road and accelerate the vehicle,
add more weight on top of that, and those tires are
scrubbing the asphalt hard.
The regenerative braking feature common on EVs, is an
additional force on the tire moving in the opposite
direction to slow the vehicle down.
A high performance tire in general wears out quickly
anyway. Now you put the load and the extra power on
that type of a tire and it's going to wear out even
quicker. I mean, some of these vehicles are wearing
tires out in 15, 20,000 miles, which is concerning
because they're wildly expensive as well.
While EVs expand, tt's hard for me to think it's not a
really good thing for Goodyear and other
manufacturers.
Michelin expects the EV tire replacement market to grow
about 6 to 7% by 2027.
It's about 1 or 2% right now.
Analytics firm AlixPartners says the total market for EV
tires is expected to grow at a 33% compound annual
rate through 2031.
Meanwhile, ICE vehicle tires are expected to
decline 2%.
The average age of a vehicle in the US was just
over 12 years in 2023.
The firm estimates the cost of replacing EV tires over
that time will be about twice what it is for Ice
vehicles. EV tires are about 50% more expensive and
need to be replaced about 20% more often.
And we've been hearing this from tire replacement chains
for about 2 to 3 years consistently.
A Tesla vehicle replaces its tires every 15,000 miles
instead of every 40 or 50,000 miles, and that
15,000 might actually be a touch on the high side.
It might be, you know, even closer to 12,000 miles.
Sometimes, if you think about that, that creates
kind of an expanding replacement market annually
for tire companies, which is something that hasn't
happened in decades.
The biggest manufacturers say their EV or EV ready
tires should last a lot longer than that.
Bridgestone Turanza EV tire has a 50,000 mile limited
warranty, and Goodyear's ElectricDrive has a 60,000
mile one.
We've developed some of these new technologies,
regardless of kind of how quickly that transition
happens. So we're going to be set up for success in
general. But but I think that we know that the EV
proliferation is going to happen. It's just a matter
of exactly how quickly it's going to happen.
Then our tires are going to become more sophisticated
and last longer.
So as we get five years out, you know, maybe it's
not going to be a 12,000 mile replacement.
It's going to be an 18,000 mile replacement.
So I think you're going to get a little bit of a
eroding of the replacement cycle as they improve their
R&D into the category.
Other tire development trends pose further
challenges and opportunities. One is tire
intelligence. The Goodyear tires that come fitted on
the Tesla Cybertruck are equipped with sensors that
measure tire temperature, pressure, and how much
rubber is actually in contact with the road.
Pulling that data together allows for some predictions
how much tread is left on the tire, when will the tire
need to be replaced, and so on.
Another area that has seen a lot of change is tire
diameter. The ever increasing size of American
vehicles has boosted demand for proportional wheels.
Rim diameters of less than 18in still make up most tire
replacement sales in the US, but larger sizes are
growing. Diameters of 18in or larger grew 10% in
February 2023 year over year.
The size proliferation is insane, and a lot of these
EVs that we're seeing have they're coming with 2020 one
inch, 22 inch wheels on them.
Tires that wrap around a wheel that size are, no
matter what they're towed, touted to do.
They're more expensive.
As people go and gravitate towards that, vehicle,
manufacturers will continue to reinforce that behavior
as they are getting rewarded for it.
And so what we've seen is over the last 15 to 20
years, a significant increase just in the number
of raw sizes in the market.
The industry is very challenging as a baseline,
but it continues to become more and more complex as it
gets, you know, newer and newer, and we get newer
sizes. And I think we're we're on the verge of
starting to see 23 and 24 inch rim diameter tires
become a big part of the market.
While all of these rapid changes, heavier torque-ier
vehicles, onboard sensors, massive wheels present
opportunities for growth.
They do strain the budgets of companies used to
operating on razor thin margins.
We've only got so much capacity.
We've only got so much research and development
capability. What parts of the market do we have to go
after at the expense of potentially other parts of
the market? And so I think you've seen again, with rim
diameters going up, some of those older vehicles may not
necessarily get all of the latest technology just
because we've got to focus on things like EV products
to to make sure that we're we're there as that market
grows.