Tire Makers Increase Customer Focus



David Shaw
05/06/2014

The world's tire industry is changing. Tire makers are striving to become more focussed on the customer. Goodyear got there a few years ago, but it took a near-bankruptcy to trigger the change.

Bridgestone has brought in Eduardo Minardi to the EU following his success in making the culture less Japanese in the Americas. His first words to staff - "Customer focus."

The theme is not hard to spot, senior management across the tire industry has realised that the old models no longer suit the modern business environment.

I've been thinking for a while that the most important secrets of the tire industry no longer revolve around technology: recipes, mixing cycles and so on. I know the hardcore engineers will dispute the following statement, but here goes: It's becoming easier to reverse-engineer a compound and to build a computer model of a competitor's tire.

The new secrets are marketing-related. What the customers want and how much they are prepared to pay for it. Talking around a trucking show at the end of April, it was pretty clear that the product offering is changing. Historically, the engineers have created products which are aimed exclusively at lifetime – which have relatively poor fuel economy; or at fuel-efficiency where lifetime is sacrificed.

After listening to the fleets, these pure concepts are being phased out in favour of less extreme products which bring aspects of fuel economy and longevity, but with a greater focus on one or the other depending on the style of the fleet operations.

That's a relatively trivial example, but it reflects the mixed operations at most truck fleets. When we look at the passenger car market, we can see a constant striving for a better price-mix. That means the main tire makers are seeking to manufacture products which they can sell at higher profit margins. An example: A premium brand in size 225/40 R18W sells for around euro 200 in the retail market. If we change the size to 225/55 R16W then the price falls to around euro 150 because there is greater competition in that size.

There's no significant difference in the cost of materials or construction of those two sizes, but one will make around double the profit of the other. So the price-mix quest is to identify the high-profit niches and make tires to meet that demand and get them to the right place at the right time.

Today, few of the Asian importers understand this market dynamic, so the Asian companies tend to look at historical sales. It usually takes two or three years until this sales data filter through to the statistics and the import-focused companies start to pick up on the fact that there might be an opportunity in that size. Meanwhile the more marketing-focussed tire makers have been able to benefit from the generous margins. Once the importers move in, prices start to fall and it is time to move on to another high-margin bubble.

Pirelli learned this lesson years ago and they developed sophisticated market analysis software which tracks the sales data for certain target vehicles by location. It is not difficult to predict 12 to 18 months after a high-value vehicle is sold, that the owner will be looking to buy some high-value replacement tires. Although OE pull-through has declined in mid-range vehicles, the pull-through in these high-value vehicles and their tires remains strong to the second, or even the third replacement cycle.

So OE contracts remain important both for the pull-through and also to understand the sales patterns of the base model and its variants. These will be important inputs to the marketing data model when the sizing and dimensions of the tires fitted to the base model and the options are also included.

Moving on to my analysis of the biggest tire makers:

At one extreme is Goodyear. When the company was near-bankrupt about a decade ago, management brought in new leadership who treat tires like fast-moving consumer goods. I was skeptical at the time. A lot of people were. During those dark days when Goodyear was losing money in its home markets, managers were able to take tough decisions with respect to those who found change difficult. The result is a leaner company with a common focus and purpose and a deep understanding of the necessity of cost-efficiency.

Nowadays, I look at Goodyear as the most marketing-oriented of the tire makers. The company spends a great deal of effort working out what the customers want and then gives that to them, ruthlessly sacrificing other aspects which might add cost, but do not add value. I think they are one to watch for the future.

At the other extreme is Michelin. My early years in this business overlapped with the former Patron, Franèois Michelin. As a devout, deeply Christian man, he is rumoured to have said that Michelin was in business to provide jobs for French workers. When Edouard took on the role, he continued with some of those values, but turned the business more toward the market.
Under the professional managers who have come since, Michelin's senior management has made efforts to transform the business from a form of social enterprise into a commercially-minded, customer-focussed business. The crisis at Michelin is not so deep as it was at Goodyear when the managers who found change difficult discovered that they needed urgently to consider their future options. As a result, the pace of change has been slow. Nevertheless, I am starting to see changes at Michelin. Prices are coming down; product developments seem to reflect market demands more than pure engineering excellence.

Despite its size and position as the world's largest tire maker, I've often thought that Bridgestone has been reluctant to lead the industry. I have imagined that this comes from the Japanese desire for consensus and calm, rational planning. On the downside, that discipline leaves little room for flair or mould-breaking changes. I don't think Bridgestone has ever surprised me with its marketing or technical developments.

The advancement of the Argentinian Minardi suggests that Bridgestone has recognised this limitation. I have not met him, but the whispers around Bridgestone suggest that we can expect to see some significant changes in its European operations.
Continental is more and more marketing focussed. I very much like their approach to market and the teams they have developed. The company is unique among the premium brands in that the tire operations are a small part of a wider group. Conti's tire activity is gaining synergies from its automotive colleagues. As the vehicle industry focusses more on software solutions compared to hardware, that has to be good for Conti's tire activity.

I always used to hold up Pirelli as a mountain of marketing skill and expertise in a field of molehills. The rise of Goodyear has now –in my opinion – eclipsed Pirelli. The Italian company continue to do things with typical Italian flair, but the professionals at Goodyear have demonstrated that there's no real substitute for going out and asking the customers what they want in a formalised, systematic way. Pirelli has one of the best marketing databases outside of Goodyear, but it seems to me that Pirelli has lost something of its former edge in this business.

This column is already 50% longer than it should be. So I must do my own market research: Do you like this kind of analysis? Would you like to read more? Email me with your comments at IQPC@TireIndustryresearch.com


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