Cooper Tire & Rubber Co (CTB), The Goodyear Tire & Rubber Company (GT), General Motors Company (GM): Should You Follow India Into the Tire Biz?

Following the Oracle

Despite rising margins in 2012, the tire industry is a commodity product business that is susceptible to volatile moves in raw material prices and cheap competition from China. Indeed, the federal government had a special tariff in place on tire imports from China until September 2012, due to allegations of product dumping by Chinese competitors. As such, investors will likely find better returns by focusing on the major customers of the tiremakers, namely the automakers, which are benefiting from lower prices and better negotiating positions.

The company with the greatest operating leverage is General Motors Company (NYSE:GM), due to the positive cost structure changes that emanated from its bankruptcy proceedings. It is also well positioned for the future, with leading market shares in fast-growing economies like China and Brazil. The company has increasingly benefited from an ability to raise average prices by convincing customers to trade up to its higher priced and more profitable crossover and SUV models. While General Motors Company (NYSE:GM)’s overall unit volumes have been flat in FY2013, the company has achieved growth in its focus markets, including North America, China, and Brazil. With the April 2013 acquisition of former subsidiary Ally Financial’s Latin American and European operations, the company is well positioned with greater customer financing programs, which should support its growth initiatives.

The bottom line

India-based Apollo Tyres may be betting big on tires with its blockbuster purchase, but that doesn’t mean that investors should follow suit. With raw material prices eventually headed back up, the tire manufacturers’ operating margins are sure to decline. A better bet is the auto manufacturers that can take advantage of price competition in the tire industry and have better pricing power with their end customers. Since the industry’s future is heading towards China, the company with the right formula for success is General Motors Company (NYSE:GM).

Robert Hanley owns shares of Cooper Tire & Rubber. The Motley Fool recommends General Motors. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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