Why Tire Companies Love EVs

The

tire

business is a business of slow change, slow growth and low margins. The total value of the market has remained around $50 billion in recent years and is also not expected to grow much in the coming years. I mean, it grows a little faster than the population, but much slower than the GDP. So, you know, in some ways it's growing more slowly than toothpaste, just like the automotive industry in general. The industry is competitive and highly susceptible to increases in raw material costs, and many buyers treat their products as commodities, often without even knowing the difference between one brand and another.

Price is often the only differentiator, but the future may look very different. Some believe that a real move towards electric vehicles will open a new realm of opportunity. After all, EV

tire

s cost 50% more and need to be changed 20% more often. The latest tires are designed to tolerate the increased weight and rapid acceleration of an electric vehicle. More importantly, improve reach. If electric vehicles evolve and proliferate among the automotive population, as some believe, it may spark what I call a gold rush for tire manufacturers. From 2017 to 2022, the US tire and rubber market grew about 9%, with the top three tire manufacturers accounting for more than half of all tire sales in the country.

Americans purchased 330 million tires in 2022, an increase of less than 1% from five years earlier. Overall demand is expected to grow around 0.8% through 2027. It's a low-growth business and it's a product we all take for granted to some extent. So given that context, tires are, I would say, one of the most competitive businesses I've followed over the years. The industry is highly exposed to raw material prices, over which

companies

have little control. Tires are composed primarily of rubber, fabric, steel, and something called carbon black, which increases durability and gives them their tar-like color. On the other hand, many buyers consider tires to be almost the same commodities they are made of.

John Healy of NorthCoast Research estimates that up to half of customers are indifferent to the brand they choose. Tire changes cannot be predicted regularly either. Some people drive a lot, others less. Other factors are the weather or the region you live in and unpredictable events such as punctures. When you take all of these things, whether it's, you know, the global nature of the business, the number of operators and competitors, there's half the customer base that buys based on price rather than brand. And then the inability to know when those customers will come to you. It just creates a dynamic where, on January 1st, it's tremendously difficult to know whether your business will grow by 3% or whether it will decline by 3%.

One of the main ways tire

companies

compete with each other is by creating a differentiated product. And how to differentiate your product? You try to make it last longer. In essence, the R&D that tire companies put into their businesses is damaging their DNA in the long term. You are decreasing replacement frequency by making tires last longer. So it's a really difficult business. Now along come electric vehicles, which pose completely new challenges. We are very good at making tires for ICE, but electric vehicles are a different animal. At first glance, today's tire looks a lot like it did 150 years ago.

A primarily rubber tube inflated with air. But since then there have been many innovations. Michelin, one of the largest tire manufacturers in the world, created the radial tire in 1946. Over the years, the rubber compounds, the materials used in them, have changed radically. That includes compounds that stay soft in colder temperatures, allowing for stronger winter tires. Today's tires are made from various types of materials and adjustments to these different ingredients. The types of compounds used, tread design, etc., can tune the tire for different types of performance. Racing tires, for example, are as slippery as possible. Consider completely treadless rear wheels on a race car, allowing for better road grip.

Tires like that can skid in wet conditions. Most road tires have some type of tread, plus other adjustments to improve them in bad weather. But treads slow down tires, which hurts the performance, gas mileage or range of electric vehicles. If you pull on one part of this, you give up the other. The real trick is to pull in several different ways. Electric vehicles offer challenges and opportunities that help distinguish tire manufacturers from each other. One interesting thing: Electric vehicles are much quieter than internal combustion engine cars, which is a mixed blessing as it makes tire noise more noticeable.

Then think about the noise a basketball makes when it bounces. That is the sound of the air inside the tire. As you bounce, the basketball rim does the same. It has, you know, inflated air. And as you overcome obstacles and do things, you can create that too. What we see with some of the platforms is that there may be sensitivity to the way the vehicle is designed at that frequency. There are ways to reduce this, such as inserting foam to dampen sound. Another challenge: extending the range of the battery, the most precious resource of electric vehicles.

Gasoline is still much more energy dense than a typical electric vehicle battery. You get much more pound for pound with a gasoline car than with current lithium-ion battery technology. The Chevy Bolt battery pack with a range of 259 miles 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, weighing just over 80 pounds. Of course, researchers are rushing to change this. While electric vehicle batteries don't store energy as efficiently as gasoline does, electric vehicles do deliver that stored energy much more efficiently. Only about 16 to 25% of the energy stored in a gallon of gasoline will actually drive the wheels;

Among other things, a fuel-burning engine loses about 65 to 72% of its energy in heat, radiating from the engine and other parts of the system. car. Electric vehicles, however, deliver about two-thirds of their energy to the wheels more if energy recovery technologies such as regenerative braking are available. Vehicles also lose energy through tires through something called rolling resistance. Basically just a force that brakes a tire as it rolls. The same force that would brake and stop a rolling ball. Because electric vehicles do not suffer energy loss through the motors, reducing that energy loss through the tires has become much more important to make electric vehicles as efficient as possible.

Upgrading the tire can have a dramatic impact on the range of an electric vehicle. We have conducted studies that have shown that the range of an electric vehicle can be affected by up to ten percent, perhaps even 15 percent, depending on the choice of tires. That means if a vehicle has 300 miles of range, you can get an extra 45 miles just by using the right tires. A key challenge, and one that could be the biggest boon for tire manufacturers: electric vehicles burn tires. This could be the first thing, from an automotive market development point of view in decades, that actually causes an increase in tire demand.

Electric vehicles weigh much 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 truck with a turbodiesel engine has a curb weight of about 5,540 pounds. The GMC Hummer EV costs almost twice as much. The EVs also accelerate faster than the Niro, with the motor accelerating from 0 to 100 km/h in about 10.4 seconds at most. The Niro EV does it in 7.8. Many electric vehicles can easily reach supercar levels of speed. I'm sure you've had the opportunity to drive an electric vehicle, and if you've driven with a friend in your electric vehicle or their electric vehicle, one of the first things they'll do is crash.

They push the pedal to the metal and you'll be thrown into the car. back in your chair and you will be quite impressed. This is due to torque, a measure of the power a motor delivers to the wheels. Electric motors don't have the same limitations as motors, so they can generate torque very quickly, essentially instantly. That's what puts you back in your seat. A car taking off like this will rub the tires more as they try to grip the road and accelerate the vehicle, it will add more weight to that, and those tires will rub the asphalt hard.

The regenerative braking feature common in electric vehicles is an additional force on the tire moving in the opposite direction to slow the vehicle. Regardless, a high-performance tire usually wears out quickly. Now you put the extra load and power on that type of tire and it will wear out even faster. I mean, some of these vehicles wear out their tires in 15 or 20,000 miles, which is concerning because they are also insanely expensive. While electric vehicles are expanding, I find it hard to think that this isn't a really good thing for Goodyear and other manufacturers. Michelin expects the EV tire replacement market to grow between 6% and 7% by 2027.

Right now, it's around 1% or 2%. Analytics firm AlixPartners says the total EV tire market is expected to grow at a CAGR of 33% through 2031. Meanwhile, ICE vehicle tires are expected to decline 2%. The average age of a vehicle in the U.S. was just over 12 years old in 2023. The firm estimates that the cost of replacing tires for electric vehicles during that time will be about double that of Ice vehicles. Electric vehicle 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 too much.

It could be even closer to 12,000 miles. Sometimes, if you think about it, it creates a sort of annually expanding replacement market for tire companies, something that hasn't happened in decades. Major manufacturers say their EV or EV-ready tires should last much longer than that. The Bridgestone Turanza EV tire has a 50,000-mile limited warranty and the Goodyear ElectricDrive has a 60,000-mile limited warranty. We have developed some of these new technologies, regardless of how quickly the transition occurs. So we will be set up for success overall. But I think we know that the proliferation of electric vehicles will happen.

It's just a question of how quickly it will happen exactly. Then our tires will be more sophisticated and last longer. So when five years go by, it may not be a 12,000 mile replacement. It will be an 18,000 mile replacement. So I think the replacement cycle will erode a little bit as they improve their R&D in the category. Other tire development trends pose more challenges and opportunities. One is tire intelligence. The Goodyear tires that come installed on the Tesla Cybertruck are equipped with sensors that measure temperature, pressure, and the amount of rubber that is actually in contact with the road.

Gathering that data allows you to make some predictions about how much tread is left on the tire, when it will need to be replaced, etc. Another area that has seen a lot of change is tire diameter. The increasing size of American vehicles has driven demand for proportional wheels. Tire diameters smaller than 18 inches still account for the majority of replacement tire sales in the U.S., but larger sizes are increasing. Diameters of 18 inches or larger grew 10% in February 2023 year-over-year. The proliferation of sizes is crazy, and many of these EVs we're seeing come with 2020 one-inch and 22-inch wheels.

The tires that wrap around a wheel of that size, withoutNo matter what they are towed, they are advertised to do. They're more expensive. As people gravitate toward and toward that vehicle, manufacturers will continue to reinforce that behavior as they are rewarded for it. And what we've seen over the last 15 to 20 years is a significant increase just in the number of raw sizes on the market. The industry is very challenging as a starting point, but it continues to become more and more complex as it becomes newer and newer and we get newer sizes. And I think we're about to start seeing tires with 23- and 24-inch rim diameters become a big part of the market.

While all of these changes are rapid, vehicles with higher torque, onboard sensors, and massive wheels present growth opportunities. They do put pressure on the budgets of companies used to operating with very low margins. We only have a certain capacity. We have limited research and development capacity. What parts of the market do we have to pursue at the expense of other potential parts of the market? And I think you've seen it again, with tire diameters increasing, some of those older vehicles may not necessarily get all the latest technology just because we have to focus on things like EV products to make sure that they' We are there as that market grows.