United States
Environmental Protection
Agency
Office Of Air Quality
Planning And Standards
Research Triangle Park, NC 27711
EPA-452/R-00-005
August 2000
Air
Economic Impact Analysis for the Proposed
Rubber Tire Manufacturing NESHAP
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This report has been reviewed by the Emission Standards Division of the Office of Air
Quality Planning and Standards of the United States Environmental Protection Agency and
approved for publication. Mention of trade names or commercial products is not intended to
constitute endorsement or recommendation for use. Copies of this report are available through
the Library Services (MD-35), U.S. Environmental Protection Agency, Research Triangle Park,
NC 27711, or from the National Technical Information Services 5285 Port Royal Road,
Springfield, VA 22161.
cf
U.S. Environmental Protection Agency
Region 5, library (PL-12J)
77 West Jackson Boulevard. 12th float
Chicago, IL 60604-3590
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CONTENTS
Section Page
1 Introduction 1-1
1.1 Agency Requirements for an EIA 1-1
1.2 Summary of EIA Results 1-2
1.3 Organization of this Report 1-3
2 Industry Profile 2-1
2.1 Background 2-1
2.1.1 Category Description 2-1
2.1.2 Environmental Concerns 2-3
2.1.3 Current Industry Status 2-3
2.2 The Supply Side 2-4
2.2.1 Production Process 2-4
2.2.2 Major By-products and Co-products 2-6
2.2.3 Types of Products and Services 2-6
2.2.4 Costs of Production 2-7
2.3 The Demand Side 2-9
2.3.1 Product Characteristics 2-9
2.3.2 Uses and Consumers 2-9
2.3.3 Consumer Substitution Possibilities 2-11
2.4 Facilities and Ownership 2-11
2.4.1 Manufacturing Plants 2-11
2.4.1.1 Tire Manufacturing Facilities 2-13
2.4.1.2 Capacity Utilization 2-13
2.4.1.3 Manufacturing Facility Employment 2-13
2.4.2 Trends 2-15
HI
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2.4.2.1 Value of Shipments 2-16
2.4.2.2 Employment 2-16
2.4.2.3 Productivity 2-17
2.4.2.4 Capital Expenditures 2-18
2.4.2.5 Technology 2-18
2.4.2.6 Number of Establishments 2-19
2.4.3 Firm Characteristics 2-19
2.4.3.1 Ownership 2-20
2.4.3.2 Size Distribution 2-20
2.4.3.3 Vertical and Horizontal Integration 2-20
2.4.3.4 Financial Condition 2-23
2.5 Markets 2-26
2.5.1 Market Structure 2-26
2.5.2 Current Market Volumes 2-28
2.5.2.1 Domestic Production 2-28
2.5.2.2 Domestic Consumption : 2-31
2.5.2.3 World Production and International Trade 2-33
2.5.3 Prices 2-36
2.5.4 Market Forecasts 2-40
2.5.4.1 Domestic Consumption 2-40
2.5.4.2 Domestic Production 2-42
2.5.4.3 International Trade 2-43
2.5.4.4 Price Forecasts 2-44
3 Economic Impact Analysis: Methods and Results 3-1
3.1 Conceptual Approach 3-1
3.2 Operational Model 3-3
3.2.1 Market Supply 3-3
3.2.2 • Market Demand 3-3
3.2.3 Control Cost Inputs and With-Regulation Equilibrium 3-4
3.3 Results 3-4
3.3.1 Market- and Industry-Level Impacts 3-4
3.3.2 Social Costs 3-5
References R-l
w
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Appendix A Economic Model of the Rubber Tire Industry A-l
Appendix B Initial Screening-Level Analysis B-l
Appendix C Sensitivity Analysis C-1
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LIST OF FIGURES
Number Page
2-1 Rubber Tire Plants in the United States, 1998 2-12
2-2 Global Tire Sales, 1996 2-27
2-3 Total Domestic Tire Production, 1985-1997 (number of tires) 2-31
2-4 Total Domestic Tire Consumption, 1985-1997 (number of tires) . 2-33
2-5 Value of Shipments, 1985-1997 2-35
2-6 Producer Price Index 2-44
3-1 Market Equilibrium Without and With Regulation 3-2
VI
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LIST OF TABLES
Number Page
2-1 Annual Production Costs, 1996 2-8
2-2 Raw Material Consumed By Kind 2-8
2-3 U.S. Tire Manufacturing Facilities Identified in Draft P-MACT 2-14
2-4 General Trends, SIC 3011,1985-1996 2-16
2-5 Productivity Trends, SIC 3011,1988-1996 2-17
2-6 SUSB Data on 3011 Establishment Changes, 1990-1995 2-19
2-7 Domestic and Ultimate Parent Employment and Sales 2-21
2-8 Solvency Ratios for SIC 3011,1997 2-23
2-9 Profitability Ratios for SIC 3011,1997 2-24
2-10 Net Earnings, 1996 2-25
2-11 Total U.S. Shipments by End-Use Market, 1993-1997 (103) 2-29
2-12 U.S. Annual Production, 1985-1997 (103 units produced) 2-30
2-13 U.S. Annual Consumption, 1985-1997 (103 units) 2-32
2-14 Value of Shipments, 1985-1997 2-34
2-15 Global Rubber Tire Production, 1996 (passenger and truck/bus
103 units) 2-35
2-16 U.S. Trade Balance and Selected Statistics (1989-1996) (current $10*) 2-37
2-17 Imports andExports, 1996-1998 2-38
2-18a Exports by Region and Major Trading Partner, 1996 2-38
2-18b Imports by Region and Major Trading Partner, 1996 2-39
2-19 Average Passenger Tires Prices Received by the Manufacturer, 1996 2-39
2-20 Projected U.S. Tire Consumption (103 units) 2-41
2-21 Projected Value of U.S. Rubber Tire Shipments ($103) 2-42
3-1 Market-Level Impacts of the Proposed Rubber Tire Manufacturing
MACT: 1997 3-5
3-2 National-Level Industry Impacts of the Proposed Rubber Tire Manufacturing
MACT: 1997 3-6
3-3 Distribution of the Social Costs Associated with the Proposed Rubber Tire
Manufacturing MACT: 1997 ($106/yr) 3-7
vn
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ACRONYMS
BLS U.S. Bureau of Labor Statistics
CPI Consumer Price Index
CSR Cost-to-Sales Ratio
DA Directly Affected Domestic Producers
EIA Economic Impact Analysis
EPA United States Environmental Protection Agency
GDP Gross Domestic Product
H Heavy Tires
HAPs Hazardous Air Pollutants
IAD Indirectly Affected Domestic Producers
IAF Indirectly Affected Foreign Producers
ISEG Innovative Strategies and Economics Group
LOR Large-Off-The-Road Tires
M Medium Tires
MACT Maximum Achievable Control Technology
NESHAP National Emission Standards for Hazardous Air Pollutants
NSPS New Source Performance Standard
OAQPS Office of Air Quality, Planning, and Standards
OE Original Equipment
OEM Original Equipment Manufacturer
P-MACT Presumptive Maximum Achievable Control Technology
PMHAPs Paniculate Matter Hazardous Air Pollutants
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PPI Producer Price Index
RFA Regulatory Flexibility Act
RMA Rubber Tire Manufacturers Association
SBREFA Small Business Regulatory Enforcement Fairness Act
SIC Standard Industrial Classification Code
VOHAPS Volatile Organic Hazardous Air Pollutants
WB Wide Base Tires
3SLS Three Stage Least Squares
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SECTION 1
INTRODUCTION
The manufacture and sale of over 300 million rubber tires annually within the United
States is indicative of the economic benefits of these products. The manufacturing process,
however, results in the release of hazardous air pollutants (HAPs) that are not accounted for
in the market value of tires. Consequently, the U.S. Environmental Protection Agency (EPA)
is developing a maximum achievable control technology (MACT) standard to reduce HAPs
from the rubber tires manufacturing source category and therefore to maximize net social
benefits. To estimate the social cost of this regulation and support this rulemaking, EPA's
Innovative Strategies and Economic Group (ISEG) has conducted an economic impact
analysis (EIA). This report documents the methods and results of this EIA.
1.1 Agency Requirements for an EIA
Congress and the Executive Office have imposed statutory and administrative
requirements for conducting economic analyses to accompany regulatory actions. Section
317 of the CAA specifically requires estimation of the cost and economic impacts for specific
regulations and standards proposed under the authority of the Act.1 The Agency's OAQPS
Economic Analysis Resource Document provides detailed instructions and expectations for
economic analyses that support rulemaking (EPA, 1999). In the case of the rubber tire
MACT, these requirements are fulfilled by examining the effect of the regulatory alternatives
on the following:
• market-level impacts,
'in addition, Executive Order (EO) 12866 requires a more comprehensive analysis of benefits and costs for
proposed significant regulatory actions. Office of Management and Budget (OMB) guidance under EO
12866 stipulates that a full benefit-cost analysis is required only when the regulatory action has an annual
effect on the economy of $100 million or more. Other statutory and administrative requirements include
examination of the composition and distribution of benefits and costs. For example, the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement and Fairness Act of
1996 (SBREFA), requires EPA to consider the economic impacts of regulatory actions on small entities.
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• industry-level impacts, and
• societal-level impacts.
1.2 Summary of El A Results
A rule that requires tire and tire-cord producers to add on few controls and modify
some solvent and cement reformulation processes will impose small production costs.
Consequently, it will generate small economic impacts in the form of increases in market
prices and decreases in rubber tires produced. These impacts will be bome largely by
consumers and to some extent by some domestic producers in terms of lower profits; other
producers (including foreign suppliers), meanwhile, will earn higher profits. The behavioral
responses and adjustments by consumers and producers to changes in market conditions will
ensure that the social costs of the regulation are lower than the pure financial or
"engineering" costs. The key results of an EIA for the rubber tire MACT are as follows.
• Engineering Costs: The engineering analysis estimates annual costs for existing
sources of $22.15 million due to the MACT.
• Sales Test: A simple "sales test," in which the annualized compliance costs are
computed as a share of sales for affected facilities, shows that all tire production
facilities are affected by less than 3 percent of sales. Even in the highest
(conservative) cost scenario, the cost-to-sales ratio (CSR) for the median facility
is 0.29 percent.
• Price and Quantity Impacts: These impacts are small.
- The average price for rubber tires is projected to increase by less than 1
percent, or $0.03 per tire.
- Rubber tire production in the United States is expected to decline by less than
1 percent, or 144,000 tires. Imports will increase by 22,000 tires, resulting in
a net decline of 122,000 tires or less than 1 percent.
• Small Businesses: No small companies manufacture rubber tires.
• Social Costs: The annual social costs are projected to be $22.14 million.
- The loss in consumer welfare is $10.07 million annually.
- The aggregate tire suppliers' surplus is expected to fall by $12.07 million.
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/ The loss in producer surplus is $14.26 million annually for directly
affected domestic suppliers.
/ Domestic producers not subject to the regulation experience an increase in
producer surplus of $0.74 million.
»/ Foreign suppliers not subject to the regulation experience an increase in
producer surplus of $1.45 million.
1.3 Organization of this Report
The remainder of this report supports and details the methodology and the results
of the EIA of the rubber tire MACT.
• Section 2 presents a profile of the affected industry prepared by Abt Associates.
• Section 3 describes the EIA methodology and reports market-, industry- and
societal-level impacts.
• Appendix A provides a description of the operational model used to develop
quantitative estimates of the economic impacts.
• Appendix B includes results from the initial screening analysis performed to
estimate economic impacts and inform the development of the economic model.
• Appendix C reports the results of the sensitivity analysis of social cost estimates
to changes in key model parameters.
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SECTION 2
INDUSTRY PROFILE1
2.1 Background
The rubber tire manufacturing industry is the subject of a New Source Performance
Standard (NSPS) published in 40 CFR Part 60 Subpart BBB, and promulgated on September
15,1987. EPA is in the process of developing a regulation that would establish limits on the
HAPs emitted from the rubber tire manufacturing process. These emission limits reflect the
MACT. This section presents an industry profile developed to support an EIA for the rubber
tire manufacturing industry MACT rule.
Industry profiles provide a general understanding of the affected industry and a basis
for the EIA. This profile contains information, gathered from various sources, on key
characteristics that are crucial to understanding the rubber tire manufacturing industry. This
section describes the source category, environmental concerns associated with the
manufacturing process, and the industry's current situation.
Section 2.2 focuses on the producers of rubber tires, the production process for rubber
tires, and the costs associated with rubber tire production. Section 2.3 describes consumers
of rubber tires and the product characteristics they value. Section 2.4 presents the
organization of the industry by using information both at the industry and facility levels.
Section 2.4 also contains information on the specific facilities identified in the presumptive
maximum control technology (P-MACT) document. The market for rubber tires is described
in Section 2.5. This section includes information on market volumes and prices, production
and consumption, international trade, and future projections for the industry.
2.1.1 Category Description
The rubber tire manufacturing source category includes any rubber tire manufacturing
facility, or any facility that manufactures rubber tire components directly associated with
rubber tire production, that is a major source or is located at a major source facility site. The
'This industry profile was prepared by Abt Associates in April 1999.
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tires can be solid or pneumatic (filled with air) and made with natural or synthetic rubber.
Component facilities can include facilities that produce rubber compound that is used in
making rubber tires at another manufacturing facility. A major source is defined as any
stationary source or group of stationary sources located within a contiguous area and under
common control that emits or has the potential to emit, considering controls, in the aggregate,
10 tons per year of any HAP or 25 tons per year of any combination of HAPs. The primary
product of the industry is rubber tires of any size or shape.
The primary Standard Industrial Classification (SIC) code associated with the rubber
tire manufacturing industry is 3011. This category includes establishments primarily engaged
in manufacturing: pneumatic casings, inner tubes, and solid and cushion tires for all types of
vehicles, airplanes, farm equipment, and children's vehicles; tiring; camelback; and tire
repair and retreading materials. Establishments primarily engaged in retreading tire services
are classified in a different industry. The MACT rule is currently focused on tire
manufacturing facilities. As a result, much of the information from this profile reflects this
focus. Some data are presented for the entire 3011 SIC category, and other data deal
specifically with tire manufacturing facilities, particularly those facilities identified in the
draft P-MACT. The coverage of different data sources is noted throughout the profile.
Facilities manufacturing three components of tires are also potentially affected by the
MACT regulation. These facilities produce tire cord, inner tubes, and retreading materials.
Tire manufacturing companies might have their own tire cord or inner tube manufacturing
facilities or may purchase cord or tubes from another company that makes only tire cord or
inner tubes. It is estimated that approximately 90 percent of tire cord produced is from
facilities owned by tire manufacturing companies (EPA, 1998). EPA has not yet determined
whether tire cord or inner tube manufacturing are significant sources of HAPs.
Retread facilities are believed to operate in much the same way as tire manufacturing
facilities and are believed to be major sources of HAPs. There are two types of retread
facilities: those that make only tread and those that put the tread around a re-ground tire
carcass. The facilities that put tread around a re-ground tire carcass are smaller facilities.
The Rubber Manufacturers Association (RMA) believes that these facilities are not likely to
be major sources (EPA, 1998).
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2.1.2 Environmental Concerns
In any type of rubber product manufacturing (including tires), the primary
environmental concerns are fugitive air emissions, solid wastes, wastewater, and hazardous
wastes. Fugitive air emissions can be released from the compounding areas, where dry
chemicals are weighed and put into containers prior to mixing. Most facilities have
eliminated this problem, however, by purchasing their chemicals in small, pre-weighed,
sealed polyethylene bags. Emissions are also generated from the rubber compounds
themselves and from solvents that are added for cement, inks, and lubrication (EPA, 1995).
Several other environmental concerns are also associated with rubber product
manufacturing facilities. Solid'waste is generated from the mixing, milling, calendering, and
extruding processes. Most of this solid waste is recycled or sold to companies who use the
rubber for some other type of product. Waste water is generated from the cooling, heating,
vulcanizing, and cleaning operations (EPA, 1995).
Two kinds of HAP emissions from rubber product manufacturing are the subject of
the MACT standard: paniculate matter hazardous air pollutants (PMHAPs) and volatile
organic hazardous air pollutants (VOHAPs). PMHAPS result mainly from the production
processes of mixing, milling, and grinding. VOHAPs are emitted when the mixing and
milling of rubber compounds generate heat, when solvents and cementing liquids are
incorporated on components for tire building, and when solvents are used in lubricating the
uncured (green) tire (EPA, 1998).
2.1.3 Current Industry Status
The mid- to late 1980s were difficult times for the world tire industry. Tire
manufacturers faced declining demand for new cars, declining tire prices, a record high U.S.
currency, and record high tire imports. As a response to this market distress, the industry
went through a period of significant restructuring and consolidation. Foreign firms bought
out several American firms, leaving the world tire industry with nine ultimate parent
companies that have annual sales in excess of $1 billion each. These nine companies account
for 80 percent of world tire sales (Ita and Gross, 1995). Four of the nine companies have
their headquarters in Japan (Bridgestone Corporation, Sumitomo Rubber Industries Ltd.,
Yokohama Rubber Co. Ltd., and Toyo Tire and Rubber Co. Ltd.), three are based in Europe
(Groupe Michelin, Continental A.G., and Pirelli), and two are headquartered in the United
States (Goodyear and Cooper).
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Despite the extensive merger and consolidation activity triggered by the difficult
market conditions in the late 1980s, the industry continued to experience economic pressures
into the 1990s. In the mid-1990s, raw material prices were increasing, plants were closing,
and companies were competing in price wars. In more recent years, some of the economic
pressures on domestic producers have declined. While labor relations remain a problem for
the industry, sales and profitability are improving in both North America and Western
Europe. Tire companies are striving to control costs without raising prices by increasing
output per man-hour worked. This trend, coupled with a decline in tire industry real wages of
0.7 percent in the last decade (Walters, 1995), prompted strikes at several plants. The labor
unrest can be seen in the strike of the Continental General Tire plant in Charlotte, NC, in
November 1998 and the strike at Titan Tire in Des Moines, IA (Rubberworld, 1999; Titan
International, 1999).
2.2 The Supply Side
The process of manufacturing rubber tires is complex and capital intensive. As a
result, facilities that produce rubber tires tend to be specialized and produce only tires.
Facilities generally specialize both by the tire product (e.g., passenger car, light truck) and the
type of tire (bias or radial) produced. This section describes the process used by tire
manufacturers to produce tires and the costs associated with this production process. Also
described are the products, by-products, and co-products produced by rubber tire
manufacturers.
2.2.1 Production Process2
The rubber tire manufacturing process consists of 11 steps:
1. Mixing involves weighing and combining various ingredients (natural and
synthetic rubbers, oil, carbon black, zinc oxide, sulfur, and other chemicals) to
create a homogenous rubber compound that is discharged to a drop mill.
2. Milling creates warm malleable sheets that are cooled and coated with an "anti-
tack solution." These sheets are then fed into an extruder.
3. Extruding forces the rubber compound through a shaped slot called a die that
forms the compound into various shapes.
2The description here relies heavily on the production process presented in the P-MACT.
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4. Calendering involves coating fibers of cloth or steel with a rubber compound,
and then curing it in an irradiation oven that bevel cuts it to a desired length,
width, and angle.
5. Bead making involves the creation of beads that provide a proper seal between
the tire and the wheel rim when a tire is mounted on the rim and inflated. In the
bead building process, bundles of wire are passed through an extrusion die where
a coat of rubber is added, and the wires are then wound into a hoop.
6. Cementing and marking processes are used at various stages throughout the tire
building process. Cements (adhesives or solvents) are added to improve the
adhesion of different components to each other throughout the process. Cement
usage can vary significantly among facilities depending on the type of tire being
manufactured and the process being used. Marking inks are used to aid in
identifying the components being managed. Typically they are applied to
extruded tread stocks to aid in identifying and handling cured tires. Marking
practices can also vary significantly among facilities.
7. The various tire components go through cooling and culture prior to tire building.
From the milling and extruding operations, the rubber sheets are placed onto long
conveyor belts that, through the application of cool air or cool water, lowers their
temperature.
8. The two main components of the tire-building process are the tire carcass build-
up drum and the tread application drum. These drum machines assemble the cut
carcass plies and belts plus the extruded tread, sidewall, and beads into tires. The
process begins with the application of a thin layer of rubber compound, the inner
liner, to the innermost carcass ply. The carcass plies are placed on the drum one
at a time, after which the beads are set in place and the plies (reinforcing layers of
cord and rubber) are turned up around them. At this stage the belts and tread
rubber are added.
9. Lubricating involves preparing the uncured (green) tire for curing. The green tire
may be coated with a lubricant (green tire spray). The function of the green tire
spray is to ensure the cured tire does not stick to the curing mold during extraction
of the tire after curing.
10. Curing involves collapsing the drum and loading the green tire into an automatic
tire press to be cured (vulcanized) at high temperature and pressure. The
vulcanization process converts the rubber and also bonds the various parts of the
tire into a singular unit.
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11. Tire finishing may involve some of the following processes: trimming, white
sidewall grinding, buffing, balancing, blemish painting, whitewall/raised letter
protectant painting, and quality control inspections. Some facilities also apply a
puncture sealant during production.
2.2.2 Major By-products and Co-products
There are generally no by-products or co-products associated with rubber tire
manufacturing. The Census of Manufactures calculates a primary products specialization
ratio on an industry-wide basis. For SIC 3011, this ratio is 98, which represents a highly
specialized industry at the manufacturing level. The primary products specialization ratio is
the primary products' value of shipments divided by the sum of the primary products' value
of shipments plus secondary products' value of shipments (U.S. Department of Commerce,
1992).
A 1996 survey of tire manufacturing facilities conducted by the RMA asked
respondents to identify what type of tires they produce and what percentage of their
production is accounted for by tire production. Most facilities surveyed responded that they
only produce tires. A few facilities listed a percentage of their production as "Other."
However, the percentage was so small that it is of no economic significance.
2.2.3 Types of Products and Services
Tires are distinguished by end use, type of construction, and performance
characteristics (EPA, 1998). Tires are produced for
• passenger cars;
• light, medium, and heavy duty trucks;
• cycles/motorcycles;
• go-carts;
• racing cars;
• industrial rolling stock;
• buses;
• off-the-road and all-terrain vehicles;
• aircraft;
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• graders/earthmovers/loaders;
• mining/logging equipment;
• high performance or speed-rated tires for passenger cars; and
• agricultural and forestry equipment.
There are also different types of tire construction. Bias-ply constructed tires use plies
that run diagonally from one bead to the other. One ply is set on a bias in one direction, and
succeeding plies are set alternately in opposing directions crossing each other. Radial
constructed tires use plies that run radially from bead to bead under the tread. This
construction requires a belt to stabilize the tread and define the tire diameter
(dunloptire.com). Radial tire construction and tread design permit more tread contact with
the road surface during hard cornering for a safer ride and also provide less forward rolling
resistance, thereby improving fuel economy. Most tire production in the United States is now
of radial-ply construction: virtually all car tires (with the exception of the temporary spare)
and more than 80 percent of truck and bus tires are of radial-ply construction. More than 90
percent of tractor and farm implement tires as well as automobile temporary spares are of
bias-ply construction. Section 2.5 contains an in-depth description of the U.S. tire market.
2.2.4 Costs of Production
Table 2-1 presents 1996 annual production cost information from the Annual Survey
of Manufactures for all establishments in SIC 3011 (U.S. Department of Commerce, 1996).
The table breaks down the costs of production into capital expenditures, raw material costs,
labor costs, electricity costs, and fuel costs. The cost of production combining all of these
inputs totals approximately $10.1 billion, which is 71 percent of the value of shipments for
1996. The largest input to the cost of production is raw materials, as shown in Table 2-1.
Table 2-2 lists the raw materials.
There are certain input substitutions for the production process available to tire
manufacturing. The clearest input substitution is to use synthetic rubber instead of natural
rubber. Many manufacturers now use synthetic rubber in addition to natural rubber.
Synthetic rubber has not completely replaced natural rubber, however, because natural rubber
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Table 2-1. Annual Production Costs, 1996
Category
Capital expenditures
Raw material costs
Labor costs
Electricity costs
Fuel costs
Total
Costs of Production
(Sio3)
578,500
7,091,400
2,140,400
191,300
86,000
$10,087,600
Percentage of Total
Production Cost
5.7
70.3
21.2
1.9
0.9
100
Percentage of Value of
Shipments
4.1
49.9
15.1
1.3
0.6
71
Source: U.S. Department of Commerce. 1985-1996. Annual Survey of Manufactures, Statistics for Industry
Groups and Industries. Tables 2 and 4. Washington, DC: Government Printing Office.
Table 2-2. Raw Material Consumed By Kind"
Latex and dry natural rubber Reclaimed rubber
Inorganic pigments Rubber compounds and mixtures purchased
Plastic resins consumed in the form of All other fabricated rubber products
granules, pellets, powders, liquids, etc.
Synthetic rubber Nylon, polyester, and metallic tire cord
Rubber processing chemicals Polyester tire cord
Plasticizers Fabricated metal products
Carbon Black Castings
Other chemical and allied products Forgings
Steel wire Paper and paperboard containers
Nonferrous shapes and forms
' Data on value of materials consumed not available in consistent reporting terms.
Source: U.S. Department of Commerce. 1992. Census of Manufactures—Rubber Products: Industry Series.
Table 7. Washington, DC: Government Printing Office.
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is a necessary input in the production of radial tires (RMA, 1997). Whether to use cement
and how much to use is another substitution possibility. The cement can be reformulated or
eliminated altogether, reducing or eliminating the HAPs associated with its use (EPA, 1998).
2.3 The Demand Side
This section describes the characteristics of tires, the major uses and consumers of
tires, and the substitution possibilities that exist for tires. This information supports analysis
of the demand for tires in the economic analysis.
2.3.1 Product Characteristics
In 1975, tire demand began to switch significantly from bias-ply tires to radial tires.
This switch is now almost complete in the passenger tire market and nearing completion in
the light truck market. Nearly all passenger car tires and more than 80 percent of highway
truck tires are radials. Radial tires have a longer life than bias-ply tires, and the switch to
radials has been a factor in reducing growth in domestic demand for replacement tires.
Using industry standards, tire performance is rated on qualities such as speed, tread
wear, traction, and temperature grade. For tires within the same category that have similar
ratings, there is little product differentiation between tire producers; thus, price is the main
distinguishing characteristic for consumers of tires within the same category of tires.
There has been continuing improvement in tire technology and tire performance over
time. Tread longevity, reduced rolling resistance, improved handling, durability, and safety
are key characteristics consumers value in tires. Typical warranties on tires have increased to
80,000 miles from 20,000 miles just a few decades ago. The newest attribute that attracts
customers is the run-flat tire. This type of tire can continue to operate safely with a flat for up
to 200 miles. Most manufacturers have already introduced this product line. Goodyear and
Michelin lead the development and Continental is set to launch its line soon.
2.3.2 Uses and Consumers
. There are two distinct markets for tires: the original equipment market and the
replacement tire market. Original equipment (OE) tires are the tires that come as equipment
on a new vehicle. The initial purchasers of OE tires are vehicle manufacturers. Replacement
tires are sold to vehicle owners through tire dealerships, chain stores, service stations,
department stores, and warehouse and discount clubs. The tires sold in the two markets are
generally the same.
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Brand loyalty is exhibited by car owners who often replace tires on their cars with the
same brand as originally installed. As a result, tire manufacturers strive to obtain original
equipment contracts. Original equipment contracts are also attractive to tire companies
because they save on distribution expenses and advertising costs (Standard & Poor's, 1998).
The two separate markets, original equipment and replacement tire, are expected to
have somewhat distinct demand functions.3 Estimated demand functions for tires have not
been identified. Generally, it is expected that both markets have inelastic demand functions
overall. For example, every new car and light truck require four tires and a spare tire, and
there are no substitutes for this standard equipment. Tires also make up an insignificant
portion of the cost of a new automobile or light truck. Market volumes for original
equipment tires are closely tied to the demand for new automobiles and light trucks, and the
demand for new automobiles tends to follow the general economic cycle of the United States.
For these reasons, the overall demand for tires is expected to be relatively inelastic with
respect to price. The new run-flat tires could eventually eliminate temporary spare tires, a
component of the original equipment market.
The overall market demand for replacement tires is also relatively inelastic, because
tire replacement is not an option that can be deferred for long, particularly when a tire is
damaged. Further, the cost of replacement tires makes up a small percentage of the operating
cost of a car. Market volumes for replacement tires are closely related to tread wear and
vehicle miles driven. Technological improvements in durability and life have decreased the
overall rate at which replacement tires are being purchased.
While we expect inelastic demand for tires at the market level, individual producers'
ability to raise prices without losing market share is limited by competition among tires with
similar characteristics. Some flexibility in pricing may be allowed by brand loyalty, but
producers are not likely to be able to deviate much from the competitive price without losing
sales. Section 2.5 presents detailed information on market volumes for the different types of
tires.
'Because passenger car and light truck tires typically account for about 90 percent of total tire sales, the
discussion of demand is focused primarily on information about these two types of tires.
2-10
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2.3.3 Consumer Substitution Possibilities
Although there are no real substitutes for tires, consumers have choices with respect
to replacement tires that can affect the demand for specific types of replacement tires. They
can choose to purchase new tires or used tires, have their tires retreaded, or purchase high-
performance tires. At this level, the demand for a specific type of tire is probably elastic and
more dependent on price. Specifically, higher prices for new replacement tires may lead
some consumers to postpone replacing worn tires or to purchase used or retreaded tires.
Vehicle manufacturers and consumers of replacement tires have several options as to
the type of tire they put on a vehicle. They can choose from different qualities of tires,
including high-performance and speed-rated tires, and they can also choose among different
brands.
High-performance and speed-rated tires have been increasing in popularity recently.
These premium-priced tires, which produce wider profit margins for tire companies, now
account for 36 percent of all original equipment passenger car tires and about 34 percent of
all replacement passenger car tires. Although these premium tires are of radial design, they
tend to wear out much faster than conventional radials and thus increase the frequency at
which tires are replaced (Standard & Poor's, 1998). This change in consumers' preferences
contributes to the demand for replacement tires.
2.4 Facilities and Ownership
This section describes the manufacturing plants that were identified in the draft
P-MACT, including the capacity utilization and employment of these facilities, trends for the
overall industry, characteristics of the firms that own the facilities potentially affected by the
regulation, and information on vertical and horizontal integration in the industry.
2.4.1 Manufacturing Plants
The entire domestic rubber tire industry, including all establishments in SIC 3011, is
composed of 104 companies owning 152 establishments (U.S. Department of Commerce,
1992) and employing 64,800 people (U.S. Department of Commerce, 1996). The draft
P-MACT identifies 14 companies and 43 facilities that manufacture tires.4 Figure 2-1 shows
'Rubber and Plastics News (1998) identifies 16 companies operating 53 tire manufacturing facilities in the
United States. Most of these ten additional facilities are very small or have very recently begun
operations.
2-11
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-------
the distribution of these facilities throughout the United States. The facilities identified in the
draft P-MACT are found in 19 states. Twenty-two of the 43 identified facilities are located in
Alabama, Dlinois, North Carolina, South Carolina, and Ohio.
2.4.1.1 Tire Manufacturing Facilities
The group of tire manufacturing facilities examined in this profile consists of 43
manufacturing facilities owned by 14 companies. The MACT regulation will affect only
those U.S. facilities that are major sources; Table 2-3 lists the rubber tire manufacturing
facilities that the regulation will potentially affect, their location, the year they opened, their
employment, the type of tire they produce, and their estimated capacity. The average age of
the tire manufacturing facilities identified in the draft P-MACT is 35 years (Rubber and
Plastics News, 1998).
2.4.1.2 Capacity Utilization
The measure of capacity utilization is based on output, measured in tires per year.
Rubber and Plastics News reported the total U.S. industry is currently capable of producing
961,780 tires per day.5 Annually, this amounts to a capacity of 344.3 million units, assuming
the facilities are open for 51 weeks a year. The RMA reported 1997 total domestic
production for its membership as 286.4 million tires. Because the RMA membership
represents 90 percent of the total domestic shipments, EPA inflated the number of tires
members of the RMA produce to provide an industry total. The estimate of total domestic
production is 318.2 million units per year. EPA derived capacity utilization for the entire
domestic tire industry by dividing the estimate for actual production of 318.2 million tires by
total production capacity 344.3 million, or 96 percent.
2.4.1.3 Manufacturing Facility Employment
Rubber and Plastic News reports the total employment of all U.S. tire manufacturers
as 59,700. Assuming the firms are using the same reporting basis, the facilities identified in
the draft P-MACT account for 56,352 of these employees, or 94 percent of total industry
employment. Table 2-3 shows the number of employees at each of the tire manufacturing
facilities identified in the draft P-MACT.
5This figure is missing data for five facilities.
2-13
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Table 2-3. U.S. Tire Manufacturing Facilities Identified in Draft P-MACT
Company Name
Bridgestone/
Firestone
Carlisle
Continental/
General Tire
Cooper Tire and
Rubber
Denman Tire
Dunlop Tire
Fidelity
Goodyear Tire
Kelly-
Springfield Tire
(a subsidiary of
Goodyear Tire)
Facility
Location
Decatur, EL
La Vergne, TN
Warren County,
TN
Wilson, NC
Oklahoma City,
OK
Des Moines, IA
Bloomington, IL
Carlisle, PA
Bryan, OH
Charlotte, NC
Mount Vernon,
IL'
Mayfield, KY
Albany, GA
Firidlay, OH
Texarkana, AR
Tupelo, MS
Leavittsburg,
OH
Buffalo, NY
Huntsville, AL
Natchez, MS
Akron, OH
Topeka, KS
Danville, VA
Gadsden, ALb
Lawton, OK
Union City, TN
Fayetteville, NC
Freeport, IL
Tyler, TX
Year
Facility
Opened
1963
1972
1990
1974
1969
1945
1965
1917
1966
1967
1991
1960
1991
1919
1964
1984
1919
1923
1969
1986
1983
1944
1966
1929
1978
1968
1969
1964
1962
Employment
2,100
1,800
885
2,140
2,050
1,777
525
735
350
1,848
431
350
900
1,000
1,250
1,100
340
1,000
1,640
200
600
2,000
2,300
2,300
2,300
3,000
2,900
1,700
1,500
Tire Type
Passenger, light truck
Passenger, light truck, truck
Truck, bus
Passenger, light truck
Passenger, light truck
Passenger, truck, bus, large
OTR
Large OTR
Light truck, industrial
Farm, large OTR, industrial
Passenger
Truck, bus
Passenger, truck, bus, farm
Passenger, light truck, truck,
bus
Passenger, light truck, truck,
bus
Passenger, light truck
Passenger
Passenger, light truck, truck,
bus, farm, large OTR,
industrial, racing
Passenger, light truck, truck,
bus, motorcycle
Passenger, light truck
Passenger, light truck, truck,
bus, farm
Racing
Truck, bus, farm, large OTR
Truck, bus, aircraft
Passenger, light truck
Passenger
Passenger, light truck
Passenger, light truck
Passenger
Passenger
Estimated
Capacity
(units/day)
24,000
18,500
5,500
41,000
43,500
12,100
300
22,000
.300
29,000
2,700
5,000
22,000
25,000
39,000
40,000
2,600
10,700
27,000
10,000
2,000
8,100
13,000
33,000
63,000
55,000
64,000
30,000
37,500
(continued)
2-14
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Table 2-3. U.S. Tire Manufacturing Facilities Identified in Draft P-MACT (continued)
Company Name
Michelin
Michelinc
Pirelli Tire
Specialty
Titan
Yokohama Tire
Total
Facility
Location
Greenville, SC
Anderson, SC
Lexington, SC
Spartanburg, SC
Dothan, AL
Lexington, SC
Norwood, NC
Ardmore, OK
Fort Wayne, IN
Opelika, AL
Tuscaloosa, AL
Hanford, CA
Indiana, PA
Des Moines, IL
Salem, VA
Year
Facility
Opened
1975
1997
1978
1979
1981
1987
1969
1961
1963
1945
1962
1915
1943
1968
1963
(Avg)
Employment
2,000
400
1,400
600
1,300
500
1,700
1,500
1,450
1,900
630
300
820
831
56,352
Tire Type
Passenger
Large OTR
Truck, bus
Light truck
Passenger
Aircraft
Passenger, light truck
Passenger, light truck
Passenger, light truck
Passenger, light truck
Passenger, light truck
Passenger, light truck, farm,
industrial, racing, aircraft
Light truck, farm
Passenger, light truck
Estimated
Capacity
(units/day)
23,000
NA
6,000
5,500
20,000
640
33,000
29,000
20,400
23,700
12,000
3,300
13,000
25,000
900,340
1 This plant is a joint venture between Continental/General Tires, Toyo, and Yokohama. The plant is managed
by Continental/General Tires.
b Goodyear announced on February 3,1999, that this facility will cease tire manufacturing by the end of 1999.
The plant will continue to mix rubber for other manufacturing plants.
c These facilities were listed in the draft P-MACT as owned by Uniroyal/Goodrich, which is now owned by
Michelin.
Source: Rubber and Plastics News. September 7,1998. 'The World's Tire Production Facilities: North
American Tire Production Facilities."
2.4.2 Trends
The data contained in Tables 2-4 and 2-5 are for all establishments in SIC 3011.
Table 2-4 shows trends in constant dollar value of shipments, employment, value of
shipments per employee, and capital expenditures. Table 2-5 shows productivity trends.
These trends are discussed in more detail below.
2-15
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Table 2-4. General Trends, SIC 3011,1985-1996
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Value of Shipments'
($1996 103)
$14,643,200
$13,553,300
$13,835,800
$14,389,300
$14,347,800
$13,965,600
$13,456,300
$13,015,800
$13,530,600
$13,825,200
$14,393,900
$14,209,300
Employment
70,300
65,200
65,400
67,800
68,000
67,700
65,500
64,600
65,100
65,100
65,700
64,800
Value of Shipments/
Employee
($1996 103)
$208
$208
$212
$212
$211
$206
$205
$201
$208
$212
$219
$219
Capital
Expenditures
($1996 103)'
$697,100
$533,300
$446,800
$534,900
$963,900 '
, $768,200
$572,900
$557,800
$525,700
$542,800
$525,200
$578,500
' Constant 1996 dollars adjusted by GDP deflator, obtained from the Economic Report to the President (1998).
Source: U.S. Department of Commerce. 1985-1996. Annual Survey of Manufactures, Statistics for Industry
Groups and Industries. Table 2. Washington, DC: Government Printing Office.
2.4.2.1 Value of Shipments
The constant dollar ($1996) value of industry shipments for the U.S. rubber tire
industry was $14.2 billion in 1996. This represents a real decrease of 3 percent from 1985.
Constant dollar values of shipments varied from 1985 to 1996, reaching a low of $13.0
billion in 1992, and a high of $14.6 billion in 1996.
2.4.2.2 Employment
Table 2-4 shows industry employment for the years 1985 through 1996. Employment
fell sharply from 1985 to 1986 and since then has fluctuated, rising somewhat in the late
1980s, and remaining between 64,600 and 65,700 through 1996. In 1996 employment levels
were 7.8 percent lower than 1985 levels (U.S. Department of Commerce, 1996). This decline
began as a result of the adverse market conditions in the mid- to late 1980s when the industry
2-16
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Table 2-5. Productivity Trends, SIC 3011,1988-1996
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
Percentage Change
Annual Output per Hour
$102.9
$103.8
$103.0
$102.4
$107.8
$116.5
$124.1
$131.1
$138.8
35%
Annual Output per Employee
$104.7
$103.5
$101.1
$99.1
$109.3
$116.0
$125.0
$131.9
$136.8
31%
Source: Bureau of Labor Statistics, Office of Productivity and Technology. January 1999. Industry
Productivity Index and Producer Price Index, "Labor Productivity Tables, 1987 Forward, All
Published 4-Digit Industries." .
experienced severe competitive pressures, excess capacity, and low prices. These conditions
made it necessary for companies to cut costs, eliminate plants, and avoid pay increases
(Sawinski, 1995). This, as mentioned earlier, has created labor relations problems in the
industry and has led to several strikes.
2.4.2.3 Productivity
The efficiency of both facilities and workers has increased over the past decade. The
average number of workers per factory has decreased over the years because of increased
productivity and automation (Sawinski, 1995). Table 2-4 shows trends in labor productivity
by using the average constant dollar value of shipments per employee from 1985 through
1996, which has increased in real terms from $208,000 to $219,000, or 5.3 percent over this
time period. Although the number of employees has decreased during these years, constant
dollar value of shipments have increased, indicating more productive workers, more efficient
processes, or both.
2-17
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Productivity can also be examined with a few key ratios. These ratios are output per
hour and output per employee. For SIC 3011, both the ratios of output per hour and output
per employee have increased from 1988 through 1996, by 35 percent and 31 percent,
respectively (see Table 2-5).
2.4.2.4 Capital Expenditures
Another trend of importance to the industry is the amount of money spent on capital
investments. Table 2-4 lists annual capital expenditures for SIC 3011 from 1985 through
1996, in 1996 dollars. These include expenditures for "(1) permanent additions and major
alternations to manufacturing establishments and (2) machinery and equipment used for
replacement and additions to plant capacity if they were of the type for which depreciation
accounts are ordinarily maintained" (U.S. Department of Commerce, 1992).
Over this time period, annual capital expenditures decreased (in real terms) by
approximately 17 percent, from around $697 million to $579 million. Capital expenditures
peaked in 1989, reaching nearly $964 million (U.S. Department of Commerce, 1996). Since
August 1997, Bridgestone/Firestone, Goodyear, and Michelin have all invested to expand
their capacity at several facilities and to construct a few newer ones. While most of the
expansion is at existing facilities, some new U.S. facilities are under construction.
A few examples of new investments for the rubber tire industry include a $435
million plant currently under construction by Bridgestone/Firestone for passenger and light
truck tires. Bridgestone/Firestone also completed a $110 million expansion of its Warren
County, TN, plant in 1994. In June 1998, Dunlop Tire Corporation also announced plans for
a $25 million expansion at its Buffalo, NY, plant.
2.4.2.5 Technology
As described in the introduction, the rubber tire manufacturing industry has gone
through a major restructuring over the last decade or so. There have also been major changes
in tire production itself. Most, if not all, manufacturing plants for passenger and light truck
tires have switched from bias-ply design to radial-ply design technology. This technological
change in production has been nearly universally implemented by this time. Over 90 percent
of the passenger tires shipped in 1997 were radial (RMA, 1997). No other technology-driven
changes in manufacturing processes have been identified at this time.
2-18
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—2.4.2.6 Nuinbfr-of Establishments
Table 2-6 contains information gathered from the Statistics of U.S. Businesses on the
number of new-and terminated establishments and information on establishments that
continued operation but either expanded or contracted their employment levels during the
years 1989 through 1995. The number of establishments includes all of SIC 3011. During
this time period, more establishments were opened than closed, and more establishments
expanded rather than contracted their employment.
Table 2-6. SUSB Data on 3011 Establishment Changes, 1990-1995
Current
Year
1990
1991
1992
1993
1994
1995
New
Establishment
Since Previous
Year*
7
12
10
8
11
10
Terminated
Establishments
Since Previous
Year"
13
3
7
8
5
3
Net
Change*
-6
+9
+3
0
+6
+7
Continuing
Establishments
Expanding
Employment*
58
40
58
62
56
63
Continuing
Establishments
Contracting
Employment*
41
69
60
42
49
54
8 Represents new or terminated establishments at any time during current year.
b Represents activity from March of previous year to March of current year.
Source: U.S. Small Business Administration, Office of Advocacy. January 1999. "Dynamic Firm Size Data for
SIC 3011." Statistics of U.S. Businesses. .
2.4.3 Firm Characteristics
The information contained in this section focuses on both the domestic parent
companies that own the facilities potentially affected by the regulation, and their ultimate
corporate parents. This section describes the ownership pattern of the firms and their
employment size distribution, respectively; explains patterns of vertical and horizontal
integration of the rubber tire industry; and discusses financial conditions in the rubber tire
industry.
2-19
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2.4.3.1 Ownership
Fourteen parent companies own the 43 facilities identified in the draft P-MACT.
Sales and employment data for domestic parent companies of the identified facilities are
important for the EIA, in particular for identifying affected small businesses. The
information on domestic parents contained in Table 2-7 was obtained from Dun & Bradstreet.
Table 2-7 also lists information on the ultimate corporate parent for information purposes
only. Data on ultimate parents were gathered from Rubber and Plastics News and corporate
websites. Goodyear and Sumitomo Rubber Industries, Ltd announced a series of joint
ventures in February 1999. The operating joint ventures in North America and Europe will
be owned 75 percent by Goodyear and 25 percent by SRI. In Japan, SRI will own 75 percent
of two joint ventures and Goodyear will own 25 percent.
2.4.3.2 Size Distribution
The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory
Enforcement Fairness Act (SBREFA) of 1996, requires federal regulatory agencies to
determine whether a proposed or final regulation will have a significant impact on a
substantial number of small entities. For SIC 3011, a small entity is defined by the Small
Business Administration as a firm with 1,000 or fewer employees. This cut-off is made
based on domestic parent employment; therefore, it is necessary to obtain employment
information at this level. At this time, there are no domestic parent companies identified that
have fewer than 1,000 employees. Table 2-7 provides employment information from Dun &
Bradstreet for both the domestic parent companies and the ultimate parents of the identified
facilities.
2.4.3.3 Vertical and Horizontal Integration
For the purpose of this profile, the Agency examined vertical integration of the
corporate parents. Vertical integration is the concentration of multiple stages of production
within a single firm. The rubber tire manufacturing parent companies tend to be highly
vertically integrated. For example, many tire companies own and operate their own
distribution systems.
2-20
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Table 2-7. Domestic and Ultimate Parent Employment and Sales
Domestic
Parent
Bridgestone/
Firestone Inc.
Carlisle
Companies
Inc.
Continental
General Tire
Cooper Tire
and Rubber
Co.
NA
Dunlop Tire
Corp.
Goodyear Tire
and Rubber
Company
Goodyear Toe
and Rubber
Company
Domestic
. ._ . _ Parent
Facilities Sales*
Bridgestone/Firestone
Decatur, IL
La Vergne, TN $6.5 billion
Warren County, TN
Wilson, NC
Oklahoma City, OK
Carlisle Tire and
Wheel $1.3 billion
Carlisle, PA
Continental/General
Tire
Bryan, OH f
Charlotte, NC $1-4 billion
Mayfield, KY
Mount Vernon, ILC
Cooper Tire and
Rubber
Findlay.OH $1.8 billion
Texarkana, AR
Tupelo, MS
Denman Tire _.
Leavittsburg, OH
Dunlop Tire t
Buffalo, NY *1/,31
Huntsville,AL imlllon
Goodyear Tire
Akron, OH
Danville, VA
Gadsden,AL $13.2
Topeka, KS billion
Lawton, OK
Union City, TN
Kelly-Springfield Tire
Fayetteville, NC
Freeport, IL J.!3'2
Tyler, TX bllllon
Domestic Ultimate
Parent Ultimate Parent Ultimate Parent
Employment* Parent Sales0 Employment"
45 000 Bridgestone $
45>00° Corporation, *"'9
* billion
japan
Carlisle
8,500 Companies $13W1Bon
inc.,
U.S.
Continental «., „
7 000 A G *o.o2
Germany
Cooper Tire
10,456 and Rubber $1.8 billion
Co., U.S.
NA NA NA
Sumitomo
, -_, Rubber M
3>276 Industries, NA
Japan
Goodyear
91310 Tireand $13'2
yi'3lv Rubber Co., billion
U.S.
Goodyear
91310 Tireand $13'2
V1>J)1U Rubber Co., billion
U.S.
96,200
8,500
44,800
10,456
NA
NA
91,310
91,310
(continued)
2-21
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Table 2-7. Domestic and Ultimate Parent Employment and Sales (continued)
Domestic
Parent
Michelin
North
America
Domestic Domestic
Parent Parent
Facilities Sales* Employment*
Michelin
Anderson / Lexington,
SC
Ardmore, Ok
Dothan, AL
Fort Wayne, IN „
Greenville, SC NA
Lexington, SC
Norwood, NC
Opelika, AL
Spartanburg, SC
Tuscaloosa, AL
Ultimate
Parent
Groupe
Michelin,
France
Ultimate
Parent Ultimate Parent
Sales'* Employment*
billion 119,800
Pirelli Tire
Corporation
Polymer
Enterprises
Inc.
International
Inc.
Yokohama
Corp. North
America
Pirelli Tire
Hanford, CA
Specialty Tires of
America
Indiana, PA
Fidelity Tire Mfg. Co.,
Titan Tire Corp.
Natchez, MS
Des Moines, IL
Yokohama Tire Corp.
Salem, VA
$104.7
million
$55 million
$690
million
$171
million
Pirelli
1,011 Group,
Italy
Polymer
500 Enterprises
Inc.,U.S.
Titan
* ,~% International
4'100 Inc.,
U.S.
Yokohama
1,651 Uudr °'
1
Japan
NA
$55 million
$690
million
NA
NAC
5001
4,100
NA
1 Dun & Bradstreet Marketing Identifier File, January 1999.
k Corporate websites.
' Reported 1,500 employees in Rubber and Plastics News.
* Converted to U.S. dollars using a currency exchange rate of 0.5912 $/DM (www.x-rates.com, January 1999).
• Reported 1,450 employees in Rubber and Plastics News.
In addition, many tire companies own their own rubber manufacturing plants and
therefore do not need to purchase rubber from independent rubber manufacturers. For
example, Goodyear Tire and Rubber Company is investing over $600 million over the next 3
years for two new synthetic rubber plants. There is also a growing trend in the industry to
own rubber plantations because it creates a strong competitive advantage (Goodyear, 1999).
Michelin is following this trend by owning and operating six rubber plantations.
2-22
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Horizontal integration measures the extent to which corporations engage in
diversified product lines. The corporations owning tire manufacturing plants do engage in
activities other than tire manufacturing. However, the majority of their sales comes from the
sale of tires. In 1997, the top nine tire producers averaged 78 percent of their corporate sales
through tire sales. Several firms engage in activities other than tire manufacturing. For
example, Bridgestone Corporation manufactures a wide range of diversified products,
including industrial rubber and chemical products and sporting goods. Seyenty-two percent
of Bridgestone Corporation's corporate sales come from the sale of tires. Groupe Michelin
also manufactures other products, but to a lesser extent than Bridgestone. Tire sales make up
93 percent of Groupe Michelin's total corporate sales. Goodyear has other lines of business
in chemicals and engineered products, but their tire line accounts for 85 percent of sales
(Tirebusiness, 1999).
2.4.3.4 Financial Condition
The financial condition of the industry's firms will affect the incidence of impacts
associated with the costs of implementing the requirements of the MACT regulation. Each
year, Dun & Bradstreet publishes Industry Norms & Key Business Ratios, which reports
certain financial ratios for a sample of firms for different industries. Tables 2-8 and 2-9
present an analysis of selected solvency and profitability ratios for 21 establishments that
manufacture tires and inner tubes included in the 1997 Dun & Bradstreet study.
Table 2-8. Solvency Ratios for SIC 3011,1997
Ratios
Cash + receivables to
current liabilities
(quick ratio)
Current assets to
current liabilities
(current ratio)
Description
Indicates the protection afforded short term creditors
by revealing the size of liquid assets available to
cover debt that falls due within one year.
Measures the degree to which current assets cover
liabilities, indicating the ability to retire current
liabilities and cover any possible shrinkage in the
value of current assets.
1997 Median for Tire
and Inner Tube
Manufacturing*
1.0
Analysis: This industry is
in a liquid position.
2.0
Analysis: This industry
has adequate coverage.
Current liabilities to net Shows the level of risks creditors are assuming with
worth funds that the owners have used to make permanent
investments.
51.1%
Analysis: This industry
poses a low level of risk.
Analysis provided by Abt Associates based on Dun & Bradstreet guidelines for interpreting financial ratios.
2-23
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Table2-9. PrpfitabiIity_RatiosforJSKLMll,1997
Ratios
Description
Median for Tire and Inner
Tube Manufacturing*
Return on sales
(profit margin)
Return on assets
Return on net worth
(return on equity)
Reveals the profits earned per dollar of sales as a
measure of the efficiency of the operation.
Indicates the firms' ability to achieve satisfactory
profits for owners and withstand adverse business
conditions.
Indicates firm profitability by matching operating
profits with assets available to earn a return.
Shows if firms are using their assets efficiently.
Analyzes the ability of management to realize an
adequate return on owners' investments.
2.5%
Analysis: The industry's
profitability is low,
indicating a low tolerance for
business downturns.
3.6%
Analysis: Indicates a low
level of operating profits
relative to investment.
4.6%
Analysis: The industry's best
measure of return, but quite
low relative to other
industries.
Analysis provided by Abt Associates based on Dun & Bradstreet guidelines for interpreting financial ratios.
Solvency, or liquidity, measurements are significant in evaluating a company's ability
to meet short- and long-term obligations. These figures are of prime interest to credit
managers of commercial companies and financial institutions. Table 2-8 presents three
solvency ratios for SIC 3011 and includes a brief analysis of these ratios developed by Abt
Associates.
Profitability ratios show how successful a business is in earning returns on invested
equity and assets. Table 2-9 presents three profitability ratios for SIC 3011 and includes a
brief analysis of these ratios developed by Abt Associates.
The rubber tire manufacturing industry profits are considered modest by other
industry standards. Within the rubber tire industry, profits for original equipment tires are
considerably lower than profits for replacement tires (Griffiths, 1997b). Recent reports of
corporate net earnings indicate that, for the last 3 years, the U.S. divisions of the major rubber
tire manufacturing companies have earned positive profits (Tirebusiness, 1999). Table 2-10
shows positive recent net earnings for all the major producers.
2-24
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Table 2-10. Net Earnings, 1996
Ultimate Parent Company —
Bridgestone
Michelin
Pirelli
Continental
Cooper
Goodyear
Sumitomo
Yokohama
Toyo
Total: Nine firms
1996 Net Earnings
rtin*>
19JLU )
646.3
609.0
300.0
128.3
107.9
101.7
43.0
34.5
9.8
3,976.5
Source: Tirebusiness. January 1999. and
.
Anecdotal information reported by the major tire producers indicates that the
companies are currently experiencing modest increases in various measures of profitability
and financial health. The examples below use data reported by the firms themselves, and no
attempt has been made to standardize the information, making comparisons difficult.
Goodyear reported a 4.4 percent increase in operating income from its tire business in
the first 9 months of 1998 over the same period in 1997. The company characterized this as a
sluggish performance relative to its competitors and attributed it to lower sales caused by the
strong U.S. dollar. Goodyear stated that increases in operating income are due to lower raw
material costs, improved productivity, and cost containment measures.
Bridgestone/Firestone, Inc., the U.S. subsidiary of Bridgestone Corporation, reported
that its net earnings for the first half of 1998 reached $149 million, a substantial increase over
the earnings of $101.3 million in the same period the prior year. The company forecast its
year-end net earnings to reach $300 million, up from $200 million in 1997 and $172 million
in 1996.
2-25
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In 1998, Continental reported that it experienced an increase in corporate profits for
the fifth year in a row, with a significant increase in after-tax profits over 1997. The U.S.
division, Continental General Tire, saw its 1998 earnings improve by 20 percent over the
previous year, despite the GM strike and a strike at their Charlotte plant.
2.5 Markets
This section discusses market structure; provides background on current market
volumes, prices and international trade; and presents information on future market volumes,
prices, and international trade. This section describes the current status of the industry and
supports the development and implementation of the EIA.
2.5.1 Market Structure
The global rubber tire manufacturing industry is fairly concentrated, dominated by
large multinational companies. This market concentration is most likely due to barriers to
entry such as the influence of brand loyalty, capital requirements related to building or
modernizing manufacturing facilities, and maintaining highly advanced research and
development facilities. However, anecdotal information and price data indicate that the
industry does behave competitively. The industry has several characteristics that classify it as
competitive:
• Manufacturers have relatively low profit ratios.
• Manufacturers compete to secure desirable original equipment contracts with auto
manufacturers.
• Consumers of replacement tires have numerous choices.
• Price is the main characteristic of tires within the same category.
• Overcapacity exerts downward price pressure.
The 11 largest tire manufacturers accounted for about 81.5 percent of the world's tire sales in
1996 (Tirebusiness, 1999). The leading three companies, Michelin, Bridgestone/Firestone,
and Goodyear, accounted for 53.5 percent of sales in 1996. Figure 2-2 shows the breakdown
of 1996 market share according to global tire sales.
2-26
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Yokohama
4%
Pirelli
5%
Sumitomo
6%
Michelin
18%
Continental
7%
Figure 2-2. Global Tire Sales, 1996
Bridgestone
18%
Goodyear
17%
Source: Tirebusiness. January 1999. and
.
In terms of market share, the "Big Three" of the tire industry (Bridgestone, Michelin,
and Goodyear) are twice as large as the next three largest companies—Continental, Pirelli,
and Sumitomo (owner of Dunlop-Europe). A study published in 1995 by Economist
Intelligence Unit reported that the Big Three had an average operating margin of 7.8 percent,
compared to an operating margin of 4.7 percent for the next smallest three firms (Griffiths,
1997b). The study authors reported that, with the exception of Cooper andlPirelli, it has
become more and more difficult over time for smaller manufacturers to earn profit margins
comparable to the Big Three. To compete with the Big Three, smaller manufacturers have
tended to focus on a specific niche (high performance or premium tires) or in regional
markets. Moreover, the report suggested this trend will continue. The Big Three are
expected to continue their acquisition activities and aggressive pricing strategies geared
toward increasing market share and profits (Griffiths, 1997b).
2-27
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2.5.2 Current Market Volumes
The following section describes current market volumes in terms of domestic
production, domestic consumption, and international trade. The rubber tire market consists
of six production classifications:
• passenger tires;
• light truck tires;
• medium, wide base, heavy and large-off-the-road tires (M/WB/H/LOR);
• front farm implement tires;
• rear farm implement tires; and
• industrial, garden tractor, and utility tires.
Two subclassifications exist within each production classification: original equipment tires
and replacement tires.
In 1997, replacement tires of all types accounted for about 76 percent of the value of
domestic market shipments (RMA, 1997). In recent years, most of the growth in tire
shipments has come from the replacement tire market. Over time, technology improvements
resulting in greater tire durability may reduce consumer demand for replacement tires.
The annual growth rate for original equipment tire shipments has steadily dropped
from 13.9 percent in 1994 to 2.4 percent in 1997 with a low of-1.8 in 1996. It is also
expected that a small component of the original equipment market, the spare tire market
("doughnuts"), will eventually diminish over the next few years if run-flat tires gain market
share. Table 2-11 presents total U.S. shipments by end-use market from 1993 to 1997. The
table also presents growth rates for the original and replacement markets, the total market, as
well as each market segment's share of total market growth.
2.5.2.1 Domestic Production
In its 1997 publication, Tire Industry Facts, the RMA reported domestic production
(including production for exports) for its members. According to the RMA, its members
represent 90 percent of domestic tire production. From 1985 to 1997, the RMA report shows
domestic production of tires grew by almost 28 percent, from 207.0 million tires to 286.4
million tires. Over this time period, the production of passenger tires grew by 24 percent,
2-28
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^Table 2-11. Total U.S. Shipments by End-Use Market, 1993-1997 (103)"
Replacement Tires
Year
1993
1994
1995
1996
1997
Average
Tires
Shipped
200,659
209,040
204,570
214,932
221,289
Market
Sector
Growth
4.2%
-2.1%
5.1%
3.0%
Percentage
of Total
Growth
3.2%
-1.6%
3.8%
2.3%
2.7%
Original Equipment Tires
Tires
Shipped
60,840
69,283
68,514
67,283
68,924
Market
Sector
Growth
13.9%
-1.1%
-1.8%
2.4%
Percentage
of Total
Growth
3.2%
-0.3%
-0.5%
0.6%
1.2%
Total Tires
Tires
Shipped
261,499
278,323
273,084
282,215
290,213
Total
Growth
6.4%
-1.9%
3.3%
2.8%
2.7%
' Represents 100 percent of U.S. domestic market excluding exports. Includes tires for passenger vehicles,
light trucks and medium, wide base, and heavy trucks only.
Source: Rubber Manufacturers Association. 1997. Tire Industry Facts, 1997. Washington, DC: Rubber
Manufacturers Association.
from 163 million units to 216 million units and accounted for 78 percent of the industry's
total growth. Domestic production was at its lowest point in 1986 because the industry
responded to the declining demand for new tires and declining tire prices with major capacity
cutbacks during the 1980s (SRI International, 1996).
In 1997, passenger tires comprised 76 percent of domestic production volumes, light
truck tires represented 12 percent, and the remaining four tire types made up the remaining 12
percent of the production volumes (RMA, 1997). Table 2-12 presents tire production data by
product classification from 1985 through 1997 as reported by RMA. Figure 2-3 presents total
production for the same period.
In 1998, the 7-week General Motors strike temporarily slowed overall production for
the original equipment tire market segment. However, since most of the growth in the rubber
tire industry came from the replacement tire market, manufacturers generally experienced
increased sales in 1998. For example, during the first 9 months of 1998, Goodyear's
domestic tire production increased by 2.4 percent over 1997. Contending with a labor strike
at one of its own facilities, Continental General still increased its overall gross sales revenues
2-29
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Table 2-12. U.S. Annual Production, 1985-1997 (103 units produced)'
Tire Category
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Passenger
162,584
159,350
167,522
174,341
175,026
174,859
169,580
192,725
197,520
201,113
210,127
210,329
216,236
Percentage of Total 1997
75.5%
Light
Truck"
23,294
22,046
26,202
26,636
27,074
25,855
23,014
26,738
27,826
29,310
30,897
31,371
33,459
M/WB/H/
LORC
10,097
8,894
9,253
10,374
10,770
9,948
9,796
10,787
12,101
13,273
14,497
15,080
15,680
Front Farm
Implement'
1,668
1,697
1,944
2,036
2,194
2,085
1,906
1,923
2,030
2,345
2,367
2,460
2,550
Rear Farm
Implement1
1,086
1,007
1,111
1,237
1,337
1,299
1,144
1,179
1,310
1,310
1,436
1,480
1,530
Ind/Gard/UtiT
8,297
7,447
9,201
7,908
8,870
10,822
9,360
11,358
11,510
13,798
14,794
15,830
16,930
Total
Tires
207,026
200,441
215,233
222,532
225,271
224,868
214,800
244,710
252,297
261,149
274,118
276,550
286,385
Production
11.7%
5.5%
0.9%
0.5%
5.9%
100.0%
a Includes shipments for domestic consumption and exports using RMA member production data only, which
represents approximately 90 percent of industry production.
b Includes estimated data provided by RMA for production from non-RMA facilities.
c Includes estimates for 1996 and 1997 using average annual growth rate for 1985-1995.
Source: Rubber Manufacturers Associatioa 1997. Tire Industry Facts, 1997. Washington, DC: Rubber
Manufacturers Association.
by 2.5 percent over 1997 by increasing passenger tire sales revenues by 2 percent and truck
tire sales revenues by 15 percent.
Foreign investment in U.S. production grew in recent years. As of 1994, foreign-
based tire manufacturers acquired almost one-half of U.S. production capacity, and some
have built or are building their own new facilities in addition to those they acquired. Factors
contributing to the increase in foreign investment include the efficient performance of U.S.
2-30
-------
300
280
260
co
J 240
S
S 220
200
180
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Figure 2-3. Total Domestic Tire Production, 1985-1997 (number of tires)
Source: Rubber Manufacturers Association. 1997. Tire Industry Facts, 1997. Washington, DC: Rubber
Manufacturers Association.
development eliminated the previous price advantage foreign producers had exporting to the
United States when the dollar was stronger.
2.5.2.2 Domestic Consumption
Table 2-13 and Figure 2-4 present consumption of tires from 1985 through 1997 by
product classification as reported by RMA.6 The data presented include RMA member
shipments plus imports. Between 1985 and 1997, domestic consumption of tires grew by just
over 25 percent, from 246.9 million tires to 309.2 million tires. Over this time period, the
consumption of passenger tires grew by 21 percent and accounted for 66 percent of the
industry's total growth. In 1997, the consumption of passenger tires consisted of 77 percent
of domestic consumption, the consumption of light truck tires represented 11 percent of the
market, and the consumption of the remaining four tire types made up the remaining 12
percent of the consumer demand for rubber tires.
*RMA typically uses the term "shipments" to represent domestically produced and imported tires, called
consumption here.
2-31
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Table 2-13. U.S. Annual Consumption, 1985-1997 (103 units)
Tire Category
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Passenger
196,294
198,659
204,805
209,425
202,326
199,450
197,259
212,101
217,481
228,431
223,809
232,420
237,272
Light
Truck"
23,800
23,900
26,026
26,777
26,430
26,544
24,761
26,332
28,198
31,240
31,579
33,439
35,079
M/WB/H
/LOR€
15,996
15,352
16,333
15,943
15,109
14,714
13,296
14,462
16,076
17,887
17,914
18,180
18,160
Front Farm
Implement'
1,936
1,860
2,161
2,266
2,342
2,291
1,943
1,969
2,033
2,172
2,133
2,150
2,160
Rear Farm
Implement0
1,055
971
1,104
1,149
1,213
1,213
1,089
1,059
1,210
1,257
1,304
1,330
1,360
IndVGardVUtilc
7,810
8,205
9,349
7,299
6,318
9,269
9,484
10,270
11,762
13,072
13,350
14,250
15,220
Total
Tires
246,891
248,947
259,778
262,859
253,738
253,481
247,832
266,193
276,760
294,059
290,089
301,769
309,251
Percentage of Total 1997 Consumption
76.7%
11.3%
5.9%
0.7%
0.4%
4.9%
100.0%
• Includes RMA member shipments plus imports for domestic consumption only, which represents
approximately 90 percent of industry shipments.
b Includes estimated data provided by RMA for production from non-RMA facilities.
c Includes estimates for 1996 and 1997 using average annual growth rate for 1985 through 1995.
Source: Rubber Manufacturers Association. 1997. Tire Industry Facts, 1997. Washington, DC: Rubber
Manufacturers Association.
Table 2-14 and Figure 2-5 present the value of shipments for SIC 3011 from 1985 to
1997 expressed in both current and real 1996 dollars, using the rubber tire producer price
index.
2-32
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320
240
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Figure 2-4. Total Domestic Tire Consumption, 1985-1997 (number of tires)
Source: Rubber Manufacturers Associatioa 1997. Tire Industry Facts, 1997. Washington, DC: Rubber
Manufacturers Association.
2.5.2.5 World Production and International Trade
The Global Market. Overall, the 1996 global rubber tire production reached 73
million units (Table 2-15). Non-U.S. producers accounted for 65 percent of this production.
Most of the growth in global production has been from increases in replacement tire
production. In absolute terms, global production of replacement tires has increased by 249
million replacement units over the 25 year period ending in 1996, compared to 90 million
OEM units. As an example of annual growth rates, in 1996, world rubber tire production for
passenger and truck/bus tires increased by about 2.8 percent over 1995 production levels.
JRecently, weak economic conditions, troubled financial markets, and disadvantageous
currency exchange rates resulted in a drop in 1998 rubber tire sales volumes in Asia and
South America. Some companies recouped their losses through increasing sales in the
mature markets of North America and Europe and expanding production in developing
countries where production costs are lower. Table 2-15 presents tire production for the
passenger and truck/bus categories for the United States and the rest of the world in 1996.
2-33
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Table 2-14. Value of Shipments, 1985-1997
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Current Value of
Shipments*
($10*)
10,434.0
9,909.5
10,427.4
11,240.1
11,680.3
11,860.8
11,882.5
11,810.0
12,601.2
13,182.9
14,073.9
14,209.3
14,013.2
GDP Price Deflator"
78.53
80.58
83.06
86.09
89.72
93.60
97.32
100.00
102.64
105.09
107.76
110.21
112.40
1996 Real Value of
Shipments
($10*)
14,643.2
13,553.3
13,835.8
14,389.3
14,347.8
13,965.6
13,456.3
13,015.8
13,530.6
13,825.2
14,393.9
14,209.3
13,740.2
* U.S. Department of Commerce. 1985-1996. Annual Survey ofManufactures, Statistics for Industry Groups
and Industries. Table 2 and Table 4. Washington, DC: Government Printing Office.
b Obtained from Economic Report of the President. 1998. .Washington, DC: Government Printing Office.
Some company-specific examples are provided below to illustrate their roles in the
global market.
• Goodyear (U.S.). In 1996, reported tire sales for Goodyear rose by 7.2 percent.
During the first 9 months of 1998, the Goodyear Company experienced weak
original equipment sales in Asia and South America but increased its worldwide
sales volume by 1 percent through increased sales to North America and Europe.
• Bridgestone/Firestone (Japan). Bridgestone/Firestone reported that it
experienced significant increases in its domestic market share since 1992 and as a
result built a new plant to meet this increased demand and to reduce its reliance on
Japanese imports.
2-34
-------
$16
$14
to
o $12
S=
m
$10
$8
-B- Current $
-•-Adjusted $1996
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Figure 2-5. Value of Shipments, 1985-1997
Base year =1982.
Source: U.S. Department of Commerce. 1985-1996. Annual Survey ofManufactures, Statistics for Industry
Groups and Industries. Table 2 and Table 4. Washington, DC: Government Printing Office.
Table 2-15. Global Rubber Tire Production, 1996 (passenger and truck/bus 103 units)
Product Category
Passenger
Truck/bus
Total
U.S.
210,329
44,987
255,316
Rest of World1
356,761
124,666
481,427
Total
567,090
169,653
736,743
' Values contain estimates from several countries
Source: Tirebusiness homepage. January 1999. and
. (primary sources: International Rubber Study Group,
individual national trade associations, World Service, Goodyear, Smithers Scientific Services Inc).
Continental General (Germany). In 1996, Continental General reported a 24
percent increase in net profits, in part by transferring production from Germany to
the Czech Republic and Portugal. During the first 9 months of 1998, Continental
General's passenger tire market volumes in Europe rose by 10 percent over 1997,
which increased their gross sales revenues by 7 percent. Also in 1998,
Continental acquired controlling interest in a South African tire manufacturer that
exports 3.5 million tires a year and supplies both replacement and original
2-35
-------
equipment car and truck tires to domestic auto manufacturing plants. Continuing
to invest in developing markets, Continental also bought two plants in Mexico
and entered into a joint venture in Slovakia, where it is planning to increase the
annual capacity of a truck tire manufacturing facility from 0.5 million units to 1.5
to 2.0 million units.
• Pirelli (Italy). In 1996, Pirelli reported that its tire sales fell by 4.6 percent due to
a strong lire, but operating profits rose by 6.9 percent.
• Surnitomo/Dunlop-Europe (Japan). In 1996, Sumitomo/Dunlop-Europe
reported that its sales revenues rose by 6.1 percent and consolidated profits rose
by 29 percent, with a forecast for further gains in 1997.
U.S. Imports and Exports. U.S. imports of rubber tire products exceed its exports.
Table 2-16 presents a summary of the U.S. trade balance for SIC 3011, along with selected
trade ratios. These ratios show that while imports' share of U.S. apparent consumption has
remained virtually the same (20 percent) from 1989 to 1996, exports' share of shipments has
doubled, causing the ratio of imports to exports to decline by over 50 percent. It has not yet
been determined if the import data reflect original equipment tire imports that are installed on
new imported vehicles, tires shipped directly to domestic vehicle manufacturers for
installation on new vehicles, or replacement tires.
Imports and exports of both passenger and light truck tires increased between 1996
and 1997 and are expected to increase again in 1998. Table 2-17 summarizes the imports and
exports of passenger and light truck tires from 1996 through 1998.
U.S. Trading Partners. The United States engages in trading with Japan, Mexico,
South Korea, and Canada. The United States has the largest trading deficit with Japan,
followed by Canada and then South Korea. Recently, Canada has been the United States'
largest trading partner. Table 2-18a and 2-18b present the 1996 value and share of tire
imports and exports by region and by major trading partner for SIC 3011, as well as the
change between 1992 and 1996 for each trading partner's share.
2.5.3 Prices
Table 2-19 shows that the average price per tire received by the seven largest
manufacturers. This price was derived by dividing the manufacturer's total tire sales by the
estimated number of tires produced by each company. The weighted average price received
by the manufacturer for the top eight companies in 1996 was $66. Prices for individual tire
categories are not currently available.
2-36
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Table 2-16. U.S. Trade Balance and Selected Statistics (1989-1996) (current $10")
to
Year
1989
1990
1991
1992
1993
1994
1995
1996
Average
Percentage
change
1989-1996
Value of
Shipments
$11,680
11,861
11,883
11,810
12,601
13,183
14,074
14,209
12,663
21.7%
Imports
$2,644
2,522
2,275
2,470
2,685
2,985
3,095
3,030
2,713
14.6%
Exports
$812
1,097
1,282
1,418
1,473
1,630
1,901
.2,004
1,452
146.8%
Trade
Deficit/
Surplus
-$1,832
-$1,425
-$993
-$1,052
-$1,212
-$1,355
-$1,194
-$1,026
-$1,261
-44.0%
Apparent
Consumption
$13,512
13,286
12,876
12,862
13,813
14,538
15,268
15,235
13,924
12.8%
Ratio of
Imports to
Consumption
0.20
0.19
0.18
0.19
0.19
0.21
0.20
0.20
0.19
0.0%
Ratio of Exports
to Product
Shipments
0.07
0.09
0.11
0.12
0.12
0.12
0.14
0.14
0.11
100.0%
Ratio of
Imports to
Exports
3.26
2.30
1.77
1.74
1.82
1.83
1.63
1.51
1.98
-53.7%
Source: U.S. Department, of Commerce, Bureau of the Census, International Trade Administration, www.ita.doc.gov/industry/otea/usfth/t26.pm.
-------
Table 2-17. Imports and Exports, 1996-1998
Passenger Tires (103)
Year
1996
1997
1998'
Imports Exports
42.6 23.7
47.8 27.7
53.0 31.0
Light Truck Tires (103)
Imports
4.8
5.7
7.5'
Exports
3.5
3.8
4.0
* Forecast.
Source: Rubber Manufacturers Association. RMA Website, .
Table 2-18a. Exports by Region and Major Trading Partner, 1996
Trade Areas
NAFTA
Latin America
Western Europe
Japan/Chinese Economic Areas
Other Asia
Rest of world
World total
Top five countries
Canada
Mexico
Japan
Germany
Netherlands
1996 Value
(S103)
1,039
223
239
257
51
146
1,955
746
294
235
71
40
Percentage of
1996 Share
53.2
11.4
12.2
13.2
2.6
7.5
100
38.1
15
12
3.6
2
Percentage Change
from 1992
9.0
16.1
2.5
7.0
18.2
10.5
8.8
7.6
13.1
7.4
6.6
-2.8
As Figure 2-5 demonstrates, beginning in 1985, the producer price index for rubber
tires subcategory within SIC 3011 fell sharply for 2 years. Tire prices reached their lowest
level in 1987 over the 1985-1997 period. After 1987, prices rose until 1995 when they
reached their highest point in the previous 10 years. Tire prices have declined by 5.5 percent
in the last 2 years, returning to levels roughly the same level as in 1985. One analyst
2-38
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Table 2-18b. Imports by Region and Major Trading Partner, 1996
Trade Areas
NAFTA
Latin America
Western Europe
Japan/Chinese Economic Areas
Other Asia
Rest of world
World total
Top five countries
Canada
Japan
South Korea
Brazil
Taiwan
1996 Value
(S103)
1083
158
419
972
327
62
3020
977
758
202
130
123
Percentage of
1996 Share
35.8
5.2
13.9
32.2
10.8
2.0
100.0
32.3
24.9
6.7
4.3
4.1
Percentage Change
from 1992
8.5
5.2
-0.3
5.9
2.8
-0.5
5.2
6.7
4.5
-0.7
4.0
-1.6
Source: U.S. Department of Commerce/International Trade Administration, DRI/McGraw-Hill and Standard &
Poor's. 1998. U.S. Industry and Trade Outlook '98: Plastics and Rubber. Washington, DC:
Government Printing Office.
Table 2-19. Average Passenger Tires Prices Received by the Manufacturer, 1996
Company
Goodyear
Michelin
Bridgestone
Continental
Sumitomo
Pirelli
Cooper
Total
Wtd Average
Unit Sales (103)
178.6
171.3
169.0
76.1
61.5
48.0
37.0
762.5
Average per Unit
($1996)
$66
$76
$73
$61
$65
$65
$43
$66
Source: Tirebusiness. January 1999. and
.
2-39
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attributed this drop in prices to Bridgestone/Firestone's recent capacity additions in the
United States (Griffiths, 1997a).
2.5.4 Market Forecasts
This section presents available information regarding forecasts of domestic
consumption and production, international trade, and market prices.
2.5.4.1 Domestic Consumption
According to the RMA's Tire Market Analysis Committee, U.S. manufacturing
consumption7 in the passenger tire category is forecasted to reach 182.5 million tires in 1998
and 185.8 million in 1999. Passenger car replacement tires have an expected long-term
growth rate of 1.57 percent annually, which would bring consumption to 198 million tires by
2003. Passenger car original equipment consumption is projected to reach 56.1 million tires
in 1998, and at least 58.4 million in 1999 surpassing the peak in 1994. It is expected that the
increase in original equipment passenger car tire consumption will continue into the future,
reaching 59 million in 2002.
Light truck replacement tire consumption is expected to reach 30.5 million tires in
1998, and 31.5 million in 1999. A forecast for the 2002-2003 period was not provided.
Light truck original equipment consumption is forecasted to be 6.4 million in 1998, to
increase to 6.6 in 1999, and then dip to 6 million a year and remain constant through 2003.
Replacement highway truck tire consumption is expected to increase to 13 million
and 13.2 million units in 1998 and 1999, respectively, and to remain constant through 2002.
Growth in highway truck original equipment consumption is expected to continue into 1998
where shipment are forecasted to peak at 5.8 million. In 1999, OEM consumption of
highway truck tires is expected to decline slightly and then remain constant at about 5 million
through 2003. Table 2-20 presents the forecast consumption data described above for the
three categories of tires and for both the OEM and replacement markets.
7RMA typically uses the term shipments to represent domestically produced and imported tires, called
consumption here.
2-40
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Table 2-20. Projected U.S. Tire Consumption (103 units)
Year
1998
1999
2002/2003
Passenger Tires
Original
Equipment
56.1
58.41
59.0
Replacement
182.5
185.8
198.0
Light Truck Tires
Original
Equipment
6.4
6.6
6.0
Replacement
30.5
31.5
NA'
Highway Truck Tires
Original
Equipment
5.8
5.71
5.0
Replacement
13.0
13.2
13.2
Total
Original
Equipment
68.3
70.7
70.0
Replacement
226.0
230.5
NA
Original
Equipment +
Replacement
294.3
300.5
NA
NA = not available.
1 Specific value not reported.
Source: Rubber Manufacturers Association. RMA Website, .
N)
-------
One source forecasts that the value of tire shipments for SIC 3011 will increase by 4.2
percent in current terms. Table 2-21 presents the forecast of the value of rubber tire
shipments for the 1998-2000 period.
Table 2-21. Projected Value of U.S. Rubber Tire Shipments C$103)
Year Value ~
1998 $14,321
1999 $14,629
2000 $14,937
Source: Damay, Arsen J. 1998. Manufacturing USA, 3011 Tires and Inner Tubes. 6th Edition. Detroit, MI:
Gale Research Inc.
Short-term prospects for demand growth of the original equipment market are
forecasted to be poor due to expected drop-offs in new car purchases (U.S. Department of
Commerce/lntemational Trade Administration, 1998). Conversely, this decline will
contribute to increased demand for replacement tires for an aging national automobile fleet.
Growth in vehicle miles traveled is also expected to contribute to increased demand for
replacement tires. Demand growth is also expected in both the light truck and the truck and
bus markets. Near-term growth in demand during 1997 and 1998 was expected to be
between 1 and 1.6 percent. Long term growth in demand for all three main tire groups is
expected to be correlated to overall GDP growth, closer to 2 percent.
2.5.4.2 Domestic Production
In recent years, the major driver for increased domestic production has been growth in
exports and, to a lesser extent, domestic demand. This is evidenced by the doubling in
exports' share of the value of shipments between 1989 and 1996, while the total value of
shipments decreased in real terms and imports' share of value of shipments remained the
same.
Domestic production is expected to continue to increase to meet domestic demand
and export demand to the extent that
• there is sufficient capacity,
2-42
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•— domestic production efficiencies-continue to result in competitively priced
products, and
• domestic and export demand increases.
At this time, domestic production capacity is being increased by current capacity additions.
The recently announced plans to close Goodyear's Gasden plant will probably offset this
trend somewhat. It is assumed that current production efficiencies of the new capacity will
meet or exceed current those of existing production.
2.5.4.3 International Trade
Demand in the global tire market is expected to rise by almost 20 percent from 1997
to 2005. Most of the growth is predicted to occur in developing countries, while demand in
North America and Europe are only forecasted to grow by 8 percent from 1997 to 2005
(Griffiths, 1997b). In the world market for tires, companies are seeking increased shares of
the growing market by cutting costs, investing in new technologies and efficiency gains, and
aggressively acquiring plants in countries such as Mexico and South Africa.
The factors that are expected to affect the future levels of international trade by U.S.
tire manufacturers are the relative strength or weakness of the world and regional economies
and currency exchange rates between the dollar and currencies of U.S. trading partners.
Despite the forecasts for growth in the world market, should the economic problems some
countries are experiencing continue or worsen, the tire manufacturing industry could again
face a crisis like the one in the early 1980s that led to price wars, plant closures, and
consolidation.
While the U.S. tire manufacturing industry sells primarily to the domestic market, the
United States has increasingly depended on the export tire market for growth. Since the early
1990s, the ratio of exports to tire product shipments has grown by 100 percent. By contrast,
imports' share of total consumption has remained steady at around 20 percent and is not
expected to change. By 2003, the long-term trade balance is expected to decrease to net
imports of about 10 million for passenger car tires and to net imports of 1 million for light
truck tires (RMA, 1999). Imports are also expected to decrease because foreign-owned tire
manufacturers are adding capacity in North America to reduce their exports to the United
States from their non-U.S. facilities.
2-43
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2.5.4.4 Price Forecasts
While specific tire price forecasts are not available for this profile, the review of
anecdotal evidence suggests that there will be continuing downward pressure on tire prices in
the near term for several reasons. First, recent trends in the producer price index shown in
Figure 2-6 indicate falling prices over the last 2 years. In addition, it is expected that a strong
dollar relative to Asian currencies combined with a dropoff in demand in the Asian and South
American markets is likely to prompt overseas manufacturers to look to the United States and
European markets to sell their relatively less expensive tires.
100
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Figure 2-6. Producer Price Index
Base year = 1982.
Source: U.S. Bureau of Labor Statistics (BLS). Producer Price Index—Commodities: WPU071201, Tires:
1990-1998. . Obtained January 20,2000a.
A strong dollar relative to other currencies is also likely to reduce demand for U.S.
exports. Some industry analysts expect U.S. firms to use near-term lower prices to gain
domestic and international market share as a way of increasing profits in the long run.
2-44
-------
Finally, increasing efficiency and capacity of domestic production will also result in
decreased cost of production. Given the competitive climate anticipated in the future, these
conditions are expected to exert price pressure on domestic producers.
2-45
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SECTION 3
ECONOMIC IMPACT ANALYSIS: METHODS AND RESULTS
The proposed MACT standard requires rubber tire and tire cord manufacturers to
meet emission standards for the release of HAPs into the environment. To meet these
standards, firms will have to use add-on controls and/or change cement and solvent
reformulation methods. These changes result in higher costs of production for the affected
producers and may induce some owners to change their current operating rates. They also
have broader societal implications because these effects are transmitted through market
relationships to consumers of rubber tires.
To measure the size and distribution of these economic impacts, the Agency
compared the baseline conditions of the U.S. tire market in 1997 with those for the with-
regulation conditions expected to result from implementing the MACT standard. The main
elements of this analysis are
• description of the Agency's conceptual approach used to estimate the impacts of
the regulation,
• development of an economic model that characterizes baseline supply and
demand for tires and evaluates the behavioral responses of economic agents to the
regulation,
• presentation and interpretation of the with-regulation conditions projected by the
model.
3.1 Conceptual Approach
The Agency modeled a competitive market for tire products in which buyers and
sellers exert no individual influence on market prices. Price is set by the collective actions of
producers and consumers of tires, who take the market price as a given in making their
production and consumption choices. Figure 3-1 illustrates this market in which prices and
quantities of rubber tires are determined by the intersection of market supply and demand
curves. The baseline consists of a market price and quantity (P, Q) that is determined by the
3-1
-------
Rubber Tire Market:
S'.
P'
P
Aggregate Supply
(Directly Affected by
Regulation)
q q
Aggregate Supply
(Indirectly Affected by
Regulation)
Q' Q
Rubber Tire Market
Figure 3-1. Market Equilibrium Without and With Regulation
downward-sloping market demand curve (DM) and the upward-sloping market supply curve
(SM).
With the regulation, the costs of production increase for tire suppliers because they
incur additional costs associated with add-on controls (tire and tire cord production) and/or
cement and solvent reformulation. Incorporating these regulatory control costs is represented
by an upward shift (from S to S') of the aggregate supply curve by the per-unit compliance
cost.
At the new equilibrium with the regulation, the market price increases from P to P'
and market output (as determined from the market demand curve, DM) declines from Q to Q'.
This illustrates the theory underlying estimation of the cost impacts of the MACT standard.
The Agency decided to restrict the EIA to the market level, rather than the facility
level, for two reasons:
• distribution of the control costs: the engineering analysis developed control cost
estimates for one model plant and there was no information on how these costs
were distributed across the regulated facilities.
• size of the control costs: as described in an initial screening analysis, all tire
production facilities are affected by less than 3 percent of sales, and the maximum
CSR for the median facility is 0.29 percent (see Appendix B).
3-2
-------
Therefore, even if the information on facility-level control costs were available, estimating
the distribution of these insignificant costs across producers will not generate any meaningful
insights.
3.2 Operational Model
To develop quantitative estimates of economic impacts, the Agency developed an
operational model using spreadsheet software. As described below and in Appendix A, this
model characterizes baseline tire supply and demand and the behavioral responses to changes
in costs and/or market prices.
3.2.1 Market Supply
EPA modeled the U.S. rubber tire market as having seven aggregate supplier types
(described in Appendix A) with upward-sloping supply curves, reflecting increasing marginal
costs as output increases. For this analysis, the simple specification (Cobb-Douglas) was
used to derive the supply curves for all seven aggregate supplier types.1 Each supply
function's parameters were calibrated using baseline production, price data, and assumptions
about the responsiveness of supply to changes in price (supply elasticity). The Agency
estimated a supply elasticity of 0.69 (i.e., a 1 percent change in the price of tires would result
in a 0.69 percent change in the tire supply). Foreign supply was assumed to be more
responsive with a supply elasticity of 1.0.
3.2.2 Market Demand
The Agency modeled the U.S. rubber tire market as having two aggregate consumers
(domestic and foreign) with downward-sloping demand curves that are consistent with the
theory of demand. This characterization simply indicates that consumption of tires is high at
low prices and low at high prices, reflecting the opportunity costs of purchasing tires. The
Agency constructed this curve for using baseline quantity, price data, and assumptions about
the responsiveness to changes in price (demand elasticity). For domestic demand, the
Agency used a demand elasticity of-0.763 (i.e., a 1 percent change in the price of tires would
result in a 0.763 percent change in quantity demanded) reported in the economic literature
'Foreign producers/consumers are considered in this analysis only to the extent that they participate in tire
transactions with U.S. producer/consumers. Thus, the model is designed to estimate the economic impacts
on the U.S. tire market. As a result, the economic welfare impacts resulting from exchanges between foreign
producers and consumers are excluded from this analysis.
3-3
-------
(Jovanovic and MacDonald, 1994). Foreign demand for U.S. tires, with a wider set of
choices, was assumed to have an elasticity of-1.0.
3.2.3 Control Cost Inputs and With-Regulation Equilibrium
\
Incorporating the tire and tire cord add-on control costs and cement and solvent
reformulation costs into the market model shifts the market supply curve upward by the
per-unit compliance cost. To develop this "cost-shifter," the Agency expressed the national
estimate of total annual compliance costs ($22.15 million) on a per-tire basis. Given this
input, the model determines a new equilibrium solution for the tire market and projects the
economic impact of the rule.
3.3 Results
The theory presented above suggests that producers attempt to mitigate the impacts of
higher-cost tire production by shifting the burden on to other economic agents to the extent
the market conditions allow. We would expect the model to project upward pressure on
prices as producers reduce output rates in response to higher costs. Higher prices reduce
quantity demanded and output for each tire product, leading to changes in economic surplus
to consumers and profitability of firms. These market adjustments determine the social costs
of the regulation and its distribution across stakeholders (producers and consumers).
3.3.1 Market- and Industry-Level Impacts
The increased cost of production due to the regulation is expected to slightly increase
the price of rubber tires and reduce their production/consumption from baseline levels. As
shown in Table 3-1, the regulatory alternative is projected to increase prices of tire products
by less than 1 percent, or $0.03 per tire. Directly affected tire output declines by 152,000
tires, while supply from domestic and foreign producers not subject to the regulation
increases by 30,000 tires, resulting in a net decline of 122,000 tires, or less than 1 percent.
Revenue, costs, and profitability of the directly affected industry also change as tire
prices and production levels adjust to increased control costs. For these producers, operating
profits are projected to decline by $14.26 million (see Table 3-2). This is a net result of three
effects: decreased revenue ($1.97 million), reductions in production costs as output declines
($9.84 million), and increased control costs ($22.14 million). In contrast, domestic
3-4
-------
Table 3-1. Market-Level Impacts of the Proposed Rubber Tire Manufacturing MACT:
1997
Price ($/tire)
Quantity (tires/yr)
Domestic"
Direct affected producers*
Indirectly affected producers
Foreign
Baseline
$64.75
371,705,556
318,205,556
290,833,035
27,372,521
53,500,000
With
Regulation
$64.78
371,583,767
318,061,374
290,680,948
27,380,426
53,522,393
Change
Absolute
$0.03
-121,789
-144,182
-152,087
7,905
22,393
Relative
0.042%
-0.033%
-0.045%
-0.052%
0.029%
0.042%
a Reflects the aggregate tire production volumes for the manufacturing facilities facing additional control costs
with implementation of the MACT.
producers, not subject to the regulation, benefit from higher prices without additional control
costs. Revenue increases by $1.25 million and production costs increase by $0.51 million in
response to higher output, resulting in an operating profit increase of $0.74 million.
3.3.2 Social Costs
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The regulation's welfare impacts, or the social costs required to
achieve environmental improvements, will extend to tire consumers and producers alike.
Consumers experience welfare impacts due to changes in market prices and consumption
levels associated with the rule. Producers experience welfare impacts resulting from changes
in profits corresponding with the changes in production levels and market prices. However,
it is important to emphasize that this measure does not include benefits that occur outside the
market, that is, the value of reduced levels of air pollution with the regulation.
The national compliance cost estimates are often used as an approximation of the
social cost of the rule. Under the MACT floor alternative, the engineering analysis estimated
annual costs of $22.15 million. In this case, the burden of the regulation falls solely on the
tire facilities that experience a profit loss exactly equal to the cost estimate. Thus, the entire
loss is a change in producer surplus with no change (by assumption) in consumer surplus.
This is typically referred to as a "full-cost absorption" scenario in which all factors of
3-5
-------
Table 3-2. National-Level Industry Impacts of the Proposed Rubber Tire
Manufacturing MACT: 1997
Directly Affected Producers*
Revenues ($106/yr)
Costs ($10'/yr)
Control
Production
Operating profits ($106/yr)
Indirectly Affected Producers
Revenues ($106/yr)
Costs ($106/yr)
Control
Production
Operating profits ($106/yr)
Domestic Producers, Total
Revenues ($106/yr)
Costs ($10'/yr)
Control •
Production
Operating profits ($106/yr)
Baseline
$18,831
$7,689
NA
$7,689
$11,143
$1,772
$724
NA
$724
$1,049
$20,604
$8,412
NA
$8,412
$12,192
With
Regulation
$18,829
$7,701
$22
$7,679
$11,129
$1,774
$724
$0
$724
$1,049
$20,603
$8,425
$22
$8,403
$12,178
Change
Absolute
-$1.97
$12.29
$22.14
-$9.84
-$14.26
$1.25
$0.51
$0.00
$0.51
$0.74
-$0.72
$12.81
$22.14
-$9.33
-$13.52
Relative
-0.01%
0.16%
NA
-0.13%
-0.13%
0.07%
0.07%
NA
0.07%
0.07%
0.00%
0.15%
NA
-0.11%
-0.11%
* Reflects the aggregate impacts for the manufacturing facilities facing additional control costs with
implementation of the MACT.
NA = Not available
production are assumed to be fixed and firms are unable to adjust their output levels when
faced with additional costs.
In contrast, the economic analysis accounts for behavioral responses by producers and
consumers to the regulation (i.e., shifting costs to other economic agents). This approach
may result in a social cost estimate that differs from the engineering estimate and also
provides insights on how the regulatory burden is distributed across stakeholders. As shown
in Table 3-3, the economic model estimates a slightly smaller total social cost of the rule of
$22.14 million. This difference between the social and engineering cost estimates is small
because the regulatory costs are small in comparison to the production costs for the tire
industry. Consumers (domestic and foreign) are projected to lose $10.07 million, directly
3-6
-------
Table 3-3. Distribution of Social Costs Associated with the Proposed Rubber Tire
Manufacturing MACT: 1997 ($106/yr)
Change in Consumer Surplus -$10.07
Domestic -$9.22
Foreign -$0.85
Change in Producer Surplus -$12.07
Domestic producers -$13.52
Directly affected* -$14.26
Indirectly affected $0.74
Foreign producers $1.45
Total Social Cost -$22.14
• Reflects the aggregate change in profits for the manufacturing facilities facing additional control costs with
implementation of the MACT.
affected producers lose $14.26, and indirectly affected domestic producers gain $0.74
million, and foreign producers gain $1.45 million.
3-7
-------
REFERENCES
Bridgestone/Firestone. January 1999. .
Darnay, Arsen J. 1998. Manufacturing USA, 3011 Tires and Inner Tubes. 6th Edition.
Detroit, MI: Gale Research Inc.
Dun & Bradstreet. 1998. Industry Norms & Key Business Ratios Desk-Top Edition
1997-1998. Murray Hill, NJ: Dun & Bradstreet Information Services.
Dun & Bradstreet. 1999. Dun's Market Identifiers [computer file]. New York, NY: Dialog
Corporation.
Dunlop Tire. January 1999. .
Economic Report of the President. 1998. Washington, DC: Government Printing Office.
Goodyear. January 1999. .
Griffiths, John. June 12,1997a. "Optimism Abounds in Spite of U.S. Price Wars."
Financial Times.
Griffiths, John. June 12,1997b. "Pressure on Profits Remain." Financial Times.
Ita, P.A., and A.C. Gross. January 1995. "Industry Corner: World Rubber and Tire."
Business Economics 30(1).
Jovanovie, Bryan, and Glenn MacDonald. 1994. "The Life Cycle of a Competitive
Industry." Journal of Political Economy 102(2):322-47.
Michelin. January 1999. .
Pirelli Tire. January 1999. .
Rubber and Plastics News. September 7,1998. "The World's Tire Production Facilities:
North American Tire Production Facilities."
Rubber Manufacturers Association. 1997. Tire Industry Facts, 1997. Washington, DC:
Rubber Manufacturers Association.
R-l
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Rubber Manufacturers Association. RMA Website, .
Rubberworld. January 1999. .
Sawinski, Diane M. 1995. U.S. Industry Profiles, The Leading 100: Rubber Products. Gale
Research Inc.
Standard & Poor's. March 5,1998. Industry Surveys: Autos and Auto Parts.
StataCorp. 1999. Stata Statistical Software: Release 6.0. College Station, TX: Stata
Corporation.
Tirebusiness. January 1999. and
.
Titan International. January 1999. .
U.S. Bureau of Labor Statistics, Office of Productivity and Technology. January 1999.
Industry Productivity Index and Producer Price Index, "Labor Productivity Tables,
1987 Forward, All Published 4-Digit Industries." .
U.S. Bureau of Labor Statistics (BLS). Producer Price Index—Commodities: WPU071201,
Tires: All years available, . As obtained on January 20,2000a.
U.S. Bureau of Labor Statistics (BLS). Producer Price Index—Commodities:
WPUSOP3000, Finished Goods: 1990-1998. . As obtained
on June 22,2000b.
U.S. Bureau of Labor Statistics (BLS). Producer Price Index—Commodities: WPU071102,
Synthetic Rubber: All years available, . As obtained on
July 29, 2000c.
U.S. Bureau of Labor Statistics (BLS). Producer Price Index—Commodities:
WPUSOP3510, Finished Energy Goods: All years available, .
As obtained on July 29,2000d.
U.S. Bureau of Labor Statistics (BLS). National Employment, Hours, and Earnings:
EEU32301006, Average Hourly Earnings of Production Workers; Tires and Inner
Tubes (SIC 301): All years available, . As obtained on July 29,
2000e.
R-2
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U.S. Department.-ofjCommerce, Bureau of the Census, International Trade-Administration.
www.ita.doc.gov/industry/otea/usfth/t26.pm. Washington, DC: Government Printing
Office.
U.S. Department of Commerce. 1992. Census of Manufactures—Rubber Products: Industry
Series. Table?. Washington, DC: Government Printing Office.
U.S. Department of Commerce. 1985-1996. Annual Survey of Manufactures, Statistics for
Industry Groups and Industries. Table 2 and Table 4. Washington, DC:
Government Printing Office.
U.S. Department of Commerce/International Trade Administration, DRI/McGraw-Hill and
Standard & Poor's. 1998. U.S. Industry and Trade Outlook '98: Plastics and
Rubber. Washington, DC: Government Printing Office.
U.S. Environmental Protection Agency (EPA). 1995. Rubber and Miscellaneous Plastics
Products Sector Notebook. Washington, DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). June 1998. Draft Presumptive Maximum
Achievable Control Technology (P-MACT)for the Rubber Tire Manufacturing Source
Category. Washington, DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 1999. OAQPS Economic Analysis Resource
Document. Durham, NC: Innovative Strategies and Economics Group.
U.S. Small Business Administration, Office of Advocacy. January 1999. "Dynamic Firm
Size Data for SIC 3011." Statistics of U.S. Businesses.
.
Walters, Steve. March 20,1995. "Overcapacity, Pricing Plague Tire Industry." Rubber and
Plastics News II 16(12):4.
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Appendix A
Economic Model of the Rubber Tire Industry
-------
The Agency developed an economic model of the U.S. rubber tire industry to estimate
the economic impacts of the proposed rule. This appendix describes the model in detail and
discusses how EPA
• characterized the supply of rubber tires at the market level,
• characterized the demand for rubber tires,
• used a solution algorithm to determine the new with-regulation equilibrium, and
• computed the values for all the impact variables presented in Section 2 of the
report.
EPA aggregated suppliers into seven groups—five types of directly affected suppliers
(described below), indirectly affected domestic supplier and foreign supplier. Demanders
were classified into domestic and foreign demanders. This aggregation scheme was adopted
because the unit control costs are small and their distribution across facilities is unknown. In
addition, simple supply and demand specifications, which depend only on a few parameters,
were chosen because of data limitations and the small size of control costs. Therefore, the
Cobb-Douglas specification, which can be represented in terms of an elasticity and a
calibration parameter, was used to characterize all functions.
A.I Supply of Rubber Tires
Market supply of tires (Qj) can be expressed as the sum of production from
• domestic producers subject to the regulation (directly affected),
• domestic producers not subject to the regulation (indirectly affected), and
• foreign supply
The directly affected producers can be further subdivided into the following five supplier
types (j) based on the types of regulatory controls:
• j = l: cement, solvent, and tire cord production add-on controls,
• j = 2: cement and solvent add-on controls only,
• j = 3: cement and solvent reformulation and tire cord production add-on controls,
• j = 4: cement and solvent reformulation only, and
A-l
-------
• j = 5: tire cord production only
EPA estimated the shares of tire supply sectors for each j supplier type as follows:
• Cement and Solvent Application Add-On Controls—22.6 percent of the market
production (7/31 facilities). One-third of this share will be affected by tire cord
production add-on controls.1 The remaining two-thirds will not be affected by tire
cord production controls.
• Solvent Reformulation—64.5 percent of the market (20/31 facilities). One-third
of this share will be affected by tire cord production add-on controls (see footnote
1). The remaining two-thirds will not be affected by tire cord production controls.
• No Cement and Solvent Control Costs—12.9 percent of the market (4/31
facilities). One-third of this share will be affected by tire cord production add-on
controls (see footnote 1). The remaining two-thirds will not be affected by tire
cord production controls.
A.1.1 Directly Affected Domestic Tire Suppliers
Tire production facilities subject to the regulation have some ability to vary output in
the face of production cost changes. Their production cost curves, coupled with the market
price, could be used to determine the optimal production rate.
The Agency modeled facilities subject to the regulation as five supplier types with the
following supply characterization:
QDAJ = ADAj [p]*>A (A.2)
In this Cobb-Douglas specification, p is the market price for tires, e^ is the domestic supply
elasticity, and ADA. is a multiplicative supply parameter that calibrates the supply equation to
replicate the estimated 1997 aggregate production from these facilities.
Estimating Domestic Supply Elasticity. Absent literature estimates, the Agency
estimated the domestic supply elasticity for rubber tires using time series data for domestic
production (from section 2 of this report) and price indices data (from the Bureau of Labor
Statistics). All price data were deflated by the consumer price index (CPI) to reflect real
rather than nominal prices. A three-stage estimation (3SLS) technique was used to address
the endogeneity of rubber tire prices in this estimation strategy (StataCorp, 1999). Price
'lire cord is an essential component of all tires. Because 4 out of 12 tire cord producers will face add-on
controls, EPA assumed approximately 33 percent of all tire manufacturing will face higher costs due to
higher tire cord input prices.
A-2
-------
indices of rubber, labor, and energy (BLS, 2000c, d, e) were used as instruments for rubber
tire price. The systems of simultaneous equations in the 3SLS are as follows:
Ln(QUres) oc, + e • Ln(PUres) + e,
Ln(Ptires) = a, + p, • Ln(Prabber) + P2 • Ln(Plabor) + P3 • LnO^) + e2 (A.3)
This analysis generated in a price elasticity (e) of 0.69, which is within the expected range of
supply elasticities. The Agency conducted sensitivity analysis of this and other model
parameters (see Appendix C).
Regulation-Induced Shift in the Supply Function. The control costs associated with
the regulation total $22.15 million2 (see Table A-l). The estimated annual compliance cost
per tire enters the directly affected supply equation as a net price change (i.e., p - Cj). Thus,
the supply function from Eq. (A.2) becomes
• ADAj IP-CjT* (A.4)
where j is the aggregate supplier type described above.
Table A-l. Summary Statistics for Annual Compliance Costs Required by the Rubber
Tire Manufacturing MACT Floor ($1997 106)
Tire cord production add-on controls $1.91
Cement and solvent application add-on controls $9.09
Solvent reformulation $11.14
Total $22.15
A.1.2 Indirectly Affected Domestic Tire Suppliers
A small share of domestic tire production (approximately 8.6 percent) does not face
additional costs of production with the regulation. However, producers' output decisions are
is value was converted from $1998 to $1997 (the baseline year of the analysis) using the following ratio:
1997m/1998Ppl = 131.8/130.7 = 1.008 (BLS, 2000b).
A-3
-------
affected by price changes expected to result from the regulation. Supply from these facilities
can De expressed by the following general formula:
™ (A.5)
where p is the market price for the product, e^ is the supply elasticity (assumed value =
0.69), and AJA is a multiplicative supply parameter that calibrates the supply equation for this
product given data on price and the supply elasticity to replicate the 1997 level of production
from these facilities.
A.1.3 Foreign Tire Suppliers3
Foreign producers also do not face additional costs of production with the regulation.
However, their output decisions are affected by price changes expected to result from the
regulation. Supply from these facilities (q^) can be expressed by the following general
formula:
qiAF = A^ p,6™ (A.6)
where p is the market price for the product, ew is the supply elasticity (assumed value = 1),
and Aw is a multiplicative supply parameter that calibrates the supply equation for this
product given data on price and the supply elasticity to replicate the 1997 level of production
from these facilities.
A.2 Demand for Rubber Tires
Market demand for rubber tires (Qd) can be expressed as the sum of domestic and
foreign demand, that is,
Qd = qd + qx (A.7)
where qd is the domestic demand and qx is the foreign demand (or exports), as described
below.
A.2./ Domestic Demand
Domestic demand for tires was expressed as
'Foreign producers/consumers are considered in this analysis only to the extent that they participate in tire
transactions with U.S. producer/consumers. Thus, the model is designed to estimate the economic impacts
on the U.S. tire market. As a result, the economic welfare impacts resulting from exchanges between
foreign producers and consumers are excluded from this analysis.
A-4
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Id = Bd p,* (A.8)
where p is the market price, t|d is the domestic demand elasticity (literature estimate =
-0.763) (Jovanovich and MacDonald, 1994), and Bd is a multiplicative demand parameter
that calibrates the demand equation for tires, given data on price and the domestic demand
elasticity to replicate the observed baseline year level of domestic consumption. This
quantity is estimated as follows:
qd = Qs-qx (A.9)
where Qs is the sum of domestic production and imports and qx is exports.
A.2.2 Foreign Demand (Exports)4
Foreign demand, or exports, for tires was also expressed as
qx = Bx ft
where p is the market price, TIX is the assumed export demand elasticity (assumed = -1), and
Bx is a multiplicative demand parameter that calibrates the foreign demand equation, given
data on price and the foreign demand elasticity to replicate the observed baseline year level of
exports.
A.3 With-Regulation Market Equilibrium
Supply/demand responses can be conceptualized as an interactive feedback process.
Producers face increased production costs due to compliance, which causes production
responses (i.e., output reduction). This leads to an increase in the market price that both
types of producers (directly affected and indirectly affected) and consumers face. This
increase leads to further responses by all producers and consumers and, thus, new market
prices. The new with-regulation equilibrium is the result of a series of these iterations
between producer and consumer responses and market adjustments until a stable market price
equilibrium in which total market supply equals total market demand (i.e., Qj =
foreign producers/consumers are considered in this analysis only to the extent that they participate in tire
transactions with U.S. producer/consumers. Thus, the model is designed to estimate the economic impacts
on the U.S. tire market. As a result, the economic welfare impacts resulting from exchanges between
foreign producers and consumers are excluded from this analysis.
A-5
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A.4 Economic Welfare Impacts
The economic welfare implications of the market price and output changes with the
regulation can be examined as changes in the net benefits of consumers and producers based
on the price changes. This analysis focuses on the changes in the net benefits of consumers
and producers. Figure A-l depicts the change in economic welfare by first measuring the
change in consumer surplus and then the change in producer surplus. In essence, the demand
and supply curves previously used as predictive devices are now being used as a tool to
measure changes in economic welfare.
In a market environment, consumers and producers of the good or service derive
welfare from a market transaction. The difference between the maximum price consumers
are willing to pay for a good and the price they actually pay is referred to as "consumer
surplus." Consumer surplus is measured as the area under the demand curve and above the
price of the product. Similarly, the difference between the minimum price producers are
willing to accept for a good and the price they actually receive is referred to as "producer
surplus" or profits. Producer surplus is measured as the area above the supply curve and
below the price of the product. These areas can be thought of as consumers' net benefits of
consumption and producers' net benefits of production, respectively. In Figure A-l, baseline
equilibrium occurs at the intersection of the demand curve, D, and supply curve, S. Price is
P, with quantity Q,. The increased cost of production with the regulation will cause the
market supply curve to shift upward to S'. The new equilibrium price of the product is P2.
With a higher price for the product, there is less consumer welfare, all else being unchanged
as real incomes are reduced. In Figure A-l (a), area A represents the dollar value of the
annual net loss in consumers' benefits with the increased price. The rectangular portion
represents the loss in consumer surplus on the quantity still consumed, Q2, while the
triangular area represents the foregone surplus resulting from the reduced quantity consumed,
QrQ2-
In addition to the changes in consumer welfare, producer welfare also changes with
the regulation. With the increase in market price, producers receive higher revenues on the
quantity still purchased, Q2. In Figure A-l(b), area B represents the increase in revenues due
to this increase in price. The difference in the area under the supply curve up to the original
market price, area C, measures the loss in producer surplus, which includes the loss
associated with the quantity no longer produced. The net change in producer welfare is
represented by area B-C.
A-6
-------
$/Q
QS, Q, QA
(a) Change in Consumer Surplus with Regulation
$/Q
•2
PI
(b) Change in Producer Surplus with Regulation
$/Q
Qj, Qt QA
(c) Net Change in Economic Welfare with Regulation
Figure A-1. Economic Welfare Changes with Regulation: Consumer and Producer
Surplus
A-7
-------
The change in economic welfare attributable to the compliance costs of the regulation
is the sum of consumer and producer surplus changes, that is, - (A) +. (B-C). Figure A-l(c)
shows the net (negative) change in economic welfare associated with the regulation as area
D. However, this analysis does not include the benefits that occur outside the market (i.e.,
the value of the reduced levels of air pollution with the regulation). Including this benefit
may reduce the net cost of the regulation or even make it positive.
A-8
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Appendix B
Initial Screening-Level Analysis
-------
EPA estimated the annual sales of rubber tires using RMA data on production for 26
affected tire production facilities and an average price of $64.75 per tire. The Agency then
calculated the distribution of these sales across tire production facilities and identified the
maximum, 75th percentile, median, 25th percentile, and minimum facility-level sales (see
Table B-l). Five potential numerators for the CSR were developed because there is no
information on the specific regulatory or control costs for each specific facility. The
following scenarios describe all possible regulatory costs that any individual facility could
incur and therefore account for the worst case scenario:
• Scenario 1—Tire cord production add-on controls only
• Scenario 2—Cement and solvent application add-on controls only
• Scenario 3—Solvent reformulation only
• Scenario 4—Tire cord production and cement and solvent application add-on
controls
• Scenario 5—Tire cord production add-on controls and solvent reformulation
Table B-l. Facility-Level" Cost-to-Sales Ratios For Rubber Tire MACT: 1997
Distribution
Maximum
75th percentile
Median
25th percentile
Minimum
Annual Sales
($)"
$1,187,964,136
$759,889,092
$620,085,342
$522,163,388
$72,732,498
Scenario 1
0.04%
0.06%
0.08%
0.09%
0.66%
Scenario 2
0.11%
0.17%
0.21%
0.25%
1.79%
Scenario 3
0.05%
0.07%
0.09%
0.11%
0.77%
Scenario 4
0.15%
0.23%
0.29%
0.34%
2.44%
Scenario 5
0.09%
0.14%
0.17%
0.20%
1.42%
Scenario 1—Tire cord production add-on controls only
Scenario 2—Cement and solvent application add-on controls only
Scenario 3—Solvent reformulation only
Scenario 4-rTire cord production and cement and solvent application add-on controls
Scenario 5—Tire cord production add-on controls and solvent reformulation
'Based on observations for 26 affected tire production facilities identified by the engineering analysis.
''Estimated using an average tire price of $64.75.
B-l
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The results show even in the worst case scenario no facility would be impacted at
greater than three percent. The worst case CSR for the median facility is 0.29 percent. The
minimum facility-level sales value was impacted at greater than one percent under scenarios
2,4, and 5. Given this analysis, EPA concluded the costs of regulation could be absorbed
within current business operations without imposing significant financial hardships.
B-2
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Appendix C
Sensitivity Analysis
-------
Economic models, such as the rubber tire EIA model developed by the Agency,
function on a parametric view of the world; that is, parameters such as prices and price
elasticities capture the key economic behaviors and interactions. Therefore, estimates of the
economic impacts of the MACT standard will necessarily be sensitive to economic
parameters used in this model. The Agency made a number of assumptions to derive the
parameters and data of the EIA model. Assumptions regarding four key parameters including
supply and demand elasticity, baseline price, and domestic production volume are described
in Table C-l. Although these assumptions are consistent with economic theory and
traditional OAQPS economic analysis procedures, it is critical to test the robustness of the
social costs estimates to alternative assumptions about key model parameters.
The Agency altered the first three model parameters by increasing and decreasing
each by 25 percent. For the domestic production volume, the Agency examined two
alternatives (75 and 100 percent) in comparison to the RMA report (EPA, 1999b) that
approximately 90 percent of domestic market production is equal to 286.4 million tires. The
results of the sensitivity analysis are presented in Table C-2.
C-l
-------
Table C-1. Economic Model Assumptions
Description
Value
Assumption
Source
Demand Elasticity
Domestic
Foreign
Supply Elasticity
Domestic
Foreign
-0.763
-1.0
0.69
1.0
Baseline Average Price $64.75
Domestic Production
Volume
0.9
Assumed to be equal to
estimate in the literature
Assumed to be more elastic
than domestic demand
Estimated by the Agency
Assumed to be more elastic
than domestic supply
Jovanovic and
MacDonald (1994)
NA
NA
NA
1996 average price reported by EPA (1999); BLS
EPA (1999) is adjusted using (2000a)
the PPI for rubber tires
RMA reported data account
for 90 percent of domestic
production
EPA (1999)
C-2
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Table C-2. Sensitivity of Social Cost Estimates to Changes in Model Parameters and Assumptions
Stakeholder
Change in Consumer
Surplus
Domestic
Foreign
Change in Producer
Surplus
Domestic
Directly affected
Indirectly affected
Foreign
Total Social Cost
EIA Results
($10*)
-$10.07
-$9.22
-$0.85
-$12.07
-$13.52
-$14.26
$0.74
$1.45
-$22.14
Demand Elasticity
-25% 25%
-14.8% 11.4%
-14.8% 11.4%
-14.8% 11.4%
12.4% -9.5%
9.4% -7.3%
8.2% -6.3%
14.8% -11.4%
14.8% -11.4%
<0.1% <0.1%
Supply Elasticity
-25% 25%
14.7% -11.5%
14.7% -11.5%
14.7% -11.5%
-12.2% 9.6%
-9.4% 7.3%
-8.1% 6.4%
-14.7% 11.5%
-14.7% 11.5%
<0.1% <0.1%
Baseline Price
-25% 25%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
<0.1% <0.1%
Domestic Production
Factor
0.75 1.00
-0.6% 0.4%
-2.0% 1.3%
14.1% -8.9%
0.5% -0.3%
2.0% -1.2%
1.7% -1.1%
3.1% -2.0%
-14.1% 8.9%
<0.1% <0.1%
o
OJ
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The summary finding is that the results reported in Section 2 are extremely robust.
As shown, changes in the four parameters do not significantly alter the total social cost
estimate; it changes by less than 0.1 percent in all cases (see Table C-l, bottom row). The
distribution of these costs across stakeholders responds moderately to changes in some of the
parameters. The results for each of the five parameters individually are as follows:
• demand elasticity: The distribution of costs shifts away from consumers to
directly affected producers with more elastic demand.
• supply elasticity: The distribution of shifts away from producers to consumers
with more elastic supply.
• baseline average price: Only marginal effects occur with this change.
• domestic production volume: Changes in the RMA percentage change domestic
production/consumption volumes. For example, a lower RMA percentage results
in higher domestic production/consumption volumes affected by the regulation.
Higher quantities result in lower estimates of per-unit control costs or "cost-
shifters," thus the model projects smaller price increases. Domestic consumers
have slightly higher losses as increases in baseline consumption quantities
outweigh the benefits of small price increases. In contrast, baseline foreign
demand (exports) remains unaltered by the change in the RMA percentage and
they benefit from smaller price increases. Directly affected producers earn higher
surplus due to smaller cost shifters. Indirectly affected producers experience a
smaller gain in response to smaller price increases. A higher RMA percentage
leads to opposite sign effects but similar magnitudes.
C-4
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
i REPORT NO.
EPA-452/R-00-005
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Impact Analysis for the Proposed Rubber Tire
Manufacturing NESHAP
5. REPORT DATE
August 2000
6. PERFORMING ORGANIZATION CODE
7 AUTHOR(S)
8. PERFORMING ORGANIZATION REPORT NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Research Triangle Park, NC 27711
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68-D-99-024
12. SPONSORING AGENCY NAME AND ADDRESS
Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
13. TYPE OF REPORT AND PERIOD COVERED
Proposed regulation
14. SPONSORING AGENCY CODE
EPA/200/04
15 SUPPLEMENTARY NOTES
16 ABSTRACT
Pursuant to Section 112 of the Clean Air Act, the U.S. Environmental Protection Agency (EPA) is developing a National
Emissions Standard for Hazardous Air Pollutants (NESHAP) to control emissions released from the domestic production of
rubber tires. The economic impact analysis (ElA) provides an estimate of the anticipated regulatory impacts of the NESHAP for
Rubber Tire Manufacturing. The information collected for this proposed rule from rubber tire manufacturers indicates that there
are 14 manufacturers with 43 facilities that are potentially affected. States with the largest concentration of facilities are
Alabama, Illinois, North Carolina, South Carolina and Ohio. None of the facilities manufacturing rubber tires are owned by
companies that are classified as small businesses.
In general, the economic impacts of this proposed rule are expected to be minimal. A market price increase of less than
1 percent, or $0.03 per tire, is predicted. Domestic producer operating profits are projected to decrease by $14 million. No
rubber tire facility is expected to close as a result of this proposed rule. The EIA estimates that domestic tire output will decline
by 144,000 tires (0.05 percent), while imports will increase by 22,000 tires (0.04 percent), resulting in a net decline of 122,000
tires, or 0.03 percent. The social cost for the existing source analysis including current producers and consumers are projected to
be $22 million. This estimate excludes annual monitoring, recordkeeping, and reporting costs. For more information on the
results of the EIA analysis, refer to the EIA in the docket. ___
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS
c. COSAT1 Field/Group
air pollution control, environmental
regulation, economic impact analysis,
rubber tire manufacturing
18.-DISTRIBUTION STATEMENT
Release Unlimited
19. SECURITY CLASS (Report)
Unclassified
21. NO. OF PAGES
47
20 SECURITY CLASS (Page)
Unclassified
22. PRICE
U.S. Environmental P/otection Agency
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