Catching Detroit's disease
Early in January, Chrysler, the U.S.'s ailing No. 3 carmaker, closed its aging, inefficient Dodge assembly plant in Hamtramck, Mich. Two weeks later, Uniroyal, the No. 4 rubber company, announced plans to shutter one of its oldest tiremaking factories, a 74-year-old mausoleum just south of Hamtramck on Detroit's Jefferson Avenue. The timing of the closings was coincidental, but it did serve as a stark reminder of how quickly a slump in the car industry can affect its many suppliers.
Especially the tire producers. The same worries about long gas lines and soaring fuel prices that have clobbered auto sales have also pummeled the rubber companies. Tire sales are declining, adding to already bulging inventories built up last summer in anticipation of an industry-wide United Rubber Workers walkout. Shipments were off 8.5% in 1979 from 1978's 205.6 million, and the industry finished the year operating at only 65% of capacity. The slowdown in new car sales is only part of the problem. Because people are driving less and are switching to smaller cars that do not wear down tires as fast as Detroit's fading dinosaurs, the replacement market has gone flat. Result: tire sales are now creeping ahead by an estimated 2% annually—at a time when the companies need much cash to deal with two big problems.
One is inflation. It costs 18% to 20% more to make a tire this year than last: the prices of synthetic rubber and other petroleum-based products helped boost the bill for raw materials by 20% to 25%, and the new union contract signed last July could push labor costs up by as much as 40% over the next three years. But even before the cost crunch hit, the industry was suffering from its slowness in the early 1970s to make radial tires.
This allowed the foreign pioneers of the long-lasting tires, notably Michelin, to seize 7% of the U.S. market. Then, after the domestic firms started producing radials, they were hurt by their very durability. Radials, which now account for about half of all tires sold in the U.S., can be driven for 50,000 miles, or about twice as long as conventional bias-ply tires. While they cost more than bias-plys, radials do not need to be replaced as often.
The smaller companies have suffered most from all these developments. Last July, IRI of Louisville, Ky., the littlest tire manufacturer, filed for bankruptcy; it was followed soon by Ohio's Mansfield Tire & Rubber (1978 sales: $112 million). Before the year was over, Indiana's McCreary Tire & Rubber ($50 million) had stopped making passenger-car tires.
The five largest firms—Goodyear, Firestone, BF Goodrich, Uniroyal and General Tire & Rubber—which account for the bulk oi the industry's daily output of 700,000-plus tires, are having
a rough time in the tire business too. The hardest hit has been Uniroyal, target of a 40-day walkout last summer that cost it an estimated $42 million in forgone sales. The strike helped convert a slender 1978 profit of $5.9 million on sales of $2.7 billion into a 1979 loss that may exceed $9 million. The most heavily debt-burdened of the companies, Uniroyal is also dragging around a $520 million unfunded vested pension liability, which is equal to more than 80% of its net worth.