Cooper Tire announced last week that it would review its internal quarterly earnings estimates in light of a planned 250 per cent tire-production increase that Firestone customers could use as replacements. Other tire makers, domestic and foreign, are also putting the pedal to the metal in their factories to accommodate motorists removing Firestone tires from Ford Motor Co Explorer sport-utility vehicles and certain other vehicles subject to the recall. "Clearly, Goodyear stands to benefit in the short term," a Goodyear spokesman said, although the tire maker says its ability to increase sales in the size being recalled is constrained by its existing capacity, which will be supplemented in October. Still, the company says that, to the extent it is successful in converting Firestone customers to Goodyear, "the medium-term market-share gains can become meaningful, sustainable and profitable."

But what about longer term? Firestone's fiasco may become a drag on the entire industry if Firestone touches off a price war to get back the inevitable market share lost due to the recall. And that is likely, some analysts caution, since Bridgestone/Firestone, a unit of Japan's Bridgestone Corp, is known for its focus on building market share in the US "If sales of Firestone tires suddenly plunge, you could see them getting very aggressive in the market in pricing," says Wendy Beale Needham, a tire analyst for Donaldson, Lufkin & Jenrette. "So this is not necessarily good news for the other big guys." The scenario would work like this: As the Firestone recall winds down, presumably sometime next spring, the company will be faced with a legacy of bad publicity and consumer skittishness about the safety of its tires.

(The Wall Street Journal) Since there are so many other tire makers to choose from, customers would simply select another brand. To combat that, Firestone would lower the prices of its tires, and other tire makers would be forced to follow suit or lose market share.

The scenario could be good for consumers, but the companies most certainly will take a beating on Wall Street. Goodyear, for its part, believes that initial market reaction to the recall indicates consumers are more interested in brand quality than in price. "If this trend continues, competitive attempts to gain back market share through price discounting may prove counterproductive and are unlikely to be successful." But that may be wishful thinking. Goodyear adds, "It is still too early to measure the full impact of the Firestone recall on our operations."

As it is, now is not a good time to be a tire maker, in Wall Street's view.

Rising prices for oil, rubber and other raw materials have taken the punch out of earnings for all the tire companies. Their stocks have been lackluster in recent months. Even when Firestone announced its recall on Aug 9, most tire companies did not see their share prices take a huge leap. The exception was Goodyear, the largest US tire maker. As proof that Wall Street is tired of tire stocks, Cooper Tire, for example, has posted steady gains over the past few years. Yet its stock has dropped by about 45 per cent in the past year alone. Goodyear's stock has underperformed the broader market in recent years, and last year the company was one of four Old Economy stalwarts dropped from the Dow Jones Industrial Average.

Attempts by tire companies to raise their prices have not been accepted by customers. At Goodyear, the company's chief executive conceded in late June that his plan earlier this year to raise prices had backfired, forcing the tire maker to lower second-quarter earning estimates by almost 40 per cent.

But as thin as the profit margins are on the tires sold to consumers, they are better than the ones obtained from the auto makers, which are notorious for squeezing their suppliers. And profits largely come when customers replace the tires that came when they bought their vehicles, which is why there is such a rush from Firestone's competitors to have enough tires on hand to handle the overflow of Ford customers now eager to ditch their Firestone tires.

But even so, realistically, Firestone's competitors cannot possibly ramp up production fast enough or cheaply enough to make serious market-share gains in the replacement market.

And if Firestone did not have enough problems, the company is wrangling with its union over contract negotiations. The United Steelworkers of America, looking to capitalise on the company's weakness, served notice on Firestone last week: hammer out a contract or face a strike. Since March, thousands of workers at nine US plants have been working on "extended contract" status.

As part of the negotiations, each side could break off talks and either enforce a lockout or strike after 14 days.

Firestone needs to keep production at its US plants humming if it has any hopes of keeping up with its recall schedule, while also limiting the number of customer defections to other tire makers. More than likely, it will broker a deal with the union that could make its long-term business costs higher than anticipated. And depending on what the union is asking for (the United Steelworkers declines to discuss specifics except to say that the negotiations involve economic and non-economic issues), Firestone's business costs could soar above those of its competitors. Union contracts are typically renegotiated every three years. So, 2003 could be the earliest opportunity to get its worker costs back in line with its competitors.

With high business costs, Firestone will be even more likely to set off a price war to gain back market share, putting a further chill on other tire makers' long-term profits, says David Garrity, a tire analyst for Dresdner Kleinwort Benson, North America LLC.

(The Wall Street Journal)