Yes, this IS important

Fellow blogger Carteach0 put up a very interesting post this morning.

My gut says this is important.... but why?

Saturday I stopped in at the local tire store to purchase new skins for the truck. This is a place I have dealt with for years, and the grouchy old fart who runs the place always ends up talking business with me. He knows what I do, and my background, so we have a common ground to speak on.

This Saturday, a new wrinkle entered the conversation. Amongst the 'Business could be a lot better' and 'No one has any money' and 'The help are idiots' stories.... something new.

Let me preface this next by explaining; This is a 'Tires-Only' retail outlet. They don't do anything else. Just sell, install, and repair tires.

He told me his biggest problem now is getting product.

A few questions on my part, and the details came out. Boil it down, and it comes to this: His company is only able to get about 60% of the tires they need to stock and sell. Six out of ten. He's had standard truck tire sizes backordered for three months now.

His company has nine locations, each able to move a truckload of units each week.

They can't get them.

Something in my gut is telling me this is important. I just can't figure out why yet.

Thoughts?

Carteach0 is right. This is important. There are a number of reasons why it's happening - none of them comforting for us.


1. The majority of tires in the USA are now imported. Most used to come from China, until the short-sighted imposition of tariffs on Chinese tires due to alleged 'dumping' - whereupon manufacturers quickly switched production to Thailand, Indonesia, Mexico and other countries exempt from the tariffs. You can read more about the problem here. Because they've become more reliant on imports, US tire suppliers are much more dependent upon a time-intensive cycle of ordering new product, then waiting for it to be shipped to this country and distributed to wholesalers and retailers.


2. All imported goods are becoming more expensive. This is due to two factors:

(a) The exchange rate of the US dollar has fluctuated wildly against other currencies since the current financial crisis began in 2007/08. As an example, here's a graph of the percentage change in the US dollar's exchange rate over the past five years (January 2007 - January 2012) against (left to right, top legend) the Euro, the British pound, the Chinese renmimbi (yuan), the Japanese yen, and the Indian rupee. (The percentage figure on the second line is the net change over the entire five-year period.)




Such fluctuations mean that importers face uncertainty when placing orders with lead times longer than a few days or weeks, because they can't be sure what the exchange rate will be when they have to pay for those orders. (They don't want to pay in full at the time they place the orders, because they don't want to lose the use of their money for the weeks or months it'll take to receive the products.) Large orders are usually insured against currency fluctuations, to protect the purchaser against such uncertainty; but fewer and fewer insurers are willing to offer such policies, because of past losses and future risks. As a result, fewer firms are either willing or able to place large longer-term orders.

(b) Developing markets are absorbing a larger and larger share of world production. For example, in 1992 China produced a million vehicles, whereas in 2010, it produced 18.26 million (the USA manufactured less than 8 million vehicles that year). All those vehicles need tires; so most of the world's production is being diverted to other markets. It's not just tires, of course, but all consumer goods that are more in demand in the booming economies of Asia and the Far East. Increased demand inevitably leads to increased prices. Furthermore, with such heavy demand right on the doorsteps of the factories making consumer goods, it's easier for them to sell their products locally than to export them, with all the added complications, paperwork and expense involved in the latter. This situation is only going to get worse, not better, as foreign economies continue to develop and their demand for goods and services grows ever larger. We're competing with billions of consumers who didn't exist a couple of decades ago; and they want the same goods we do.

Because imported goods are more expensive, companies can afford to buy less of them, and keep less of them in stock.


3. Sellers in the USA are finding it much harder to obtain credit to buy stock. US firms typically rely on bank credit to fund large orders. Relatively few businesses have sufficient cash reserves to fund them out of their own resources. Instead, they rely on overdrafts or loans to place such orders, then repay the borrowed money from the proceeds of selling the goods (only to take out further loans, or draw upon revolving credit facilities, to place new orders). Unfortunately, US banks are now much more reluctant to offer such credit facilities. Many of their earlier (and fiscally imprudent) loans have gone into default, and they face more onerous reserve requirements, capital requirements and statutory liquidity ratios, which mean they must retain more cash for their own needs rather than lend it to others. Smaller businesses are hurting for cash and credit right now.


4. Consumers in the USA are also credit-restricted and cash-poor. Most rely on credit facilities (e.g. credit cards, bank overdrafts, home equity lines of credit [HELOC's], etc.) to buy goods (particularly more expensive goods like tires). Those credit facilities have also become more restricted since the start of the economic crisis. In particular, the single largest source of household 'wealth' in the first part of this century, the value of consumers' homes, has effectively evaporated, because as housing values dropped precipitously, banks reduced or canceled HELOC facilities. The very high rate of unemployment (officially 8-9 per cent, but in reality probably over 20%, as we've previously discussed) also means that many consumers simply can't afford to buy expensive things like tires. Since, for all these reasons, consumer demand has been reduced, companies must, in response, reduce the size and scope of their inventories. This leads to shortages.


5. Finally, risk management is a major limiting factor in the US economy right now. Companies simply don't know what to expect, either economically or politically. The impact and cost of Obamacare is still unknown, but it's likely to be very expensive; no-one can predict whether current levels of US debt and deficit spending will be maintained (and, if they are, what the inflationary effects of the Fed's rampant quantitative easing might be); most authorities are predicting serious economic problems in Europe very soon, which will almost certainly affect the rest of the world; and so on. Given so much uncertainty, firms are reluctant to order large reserves of inventory, and banks are reluctant to make loans or extend credit that might not be repaid. Both suppliers and consumers in general appear to be unwilling to make major purchases or investments, preferring to pay down their existing debt and/or build up reserves (so-called deleveraging).


So, if you want to know why your supplier(s) is/are out of tires . . . that's why. It's not so much a question of tires alone, but of the health of the entire US and world economy. Expect more of the same in other areas of business, commerce and industry Real Soon Now.

Peter