Why Tire Companies Love EVs

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 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. And so given that backdrop, tires are what I would say amongst the most competitive businesses I've 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. North Coast researchers 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. 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 1, 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 tread 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 the basketball makes when it bounces. That's the air inside the tire ringing as you bounce a 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 is 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 typical EV battery. You get a lot more pound for pound in 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 percent 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 percent 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 EV's range. We've done studies that have shown that you can impact the range of an electric vehicle by as much as 10, maybe even 15 percent, 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 percent 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. The Niro with an engine accelerates from zero to 100 kilometers per hour 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 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. High performance tire in general wears out quickly anyway. Now you put the load and that 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 15,000, 20,000 miles, which is concerning because they're wildly expensive as well. While EVs expand, it'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 percent by 2027. It's about 1 or 2 percent right now. Analytics firm Alex Partners says the total market for EV tires is expected to grow at a 33 percent compound annual rate through 2031. Meanwhile, ICE vehicle tires are expected to decline 2 percent. The average age of a vehicle in the U.S. 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 percent more expensive and need to be replaced about 20 percent more often. We've been hearing this from tire replacement chains for about two to three 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 a 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's Teranza EV tire has a 50,000 mile limited warranty and Goodyear's electric drive has a 60,000 mile one. So 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. Their tires are going to become more sophisticated and last the 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 18 inches still make up most tire replacement sales in the U.S., but larger sizes are growing. Diameters of 18 inches or larger grew 10 percent in February 2023, year over year. The size proliferation is insane. A lot of these EVs that we're seeing have, they're coming with 20, 21 inch, 22 inch wheels on them. Tires that wrap around a wheel that size are, no matter what they're touted to do, they are 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 newer and newer and we get newer sizes. And I think 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, torquier 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 make sure that we're there as that market grows.