Goodyear, called a stealth EV play, is investing to hold its competitive advantage

Published Sun, Mar 20 20228:28 AM EDT

Even Goodyear Tire & Rubber 's chief financial officer was initially surprised about the competitive advantage of electric vehicle tires. When Goodyear bids for tire contracts with automakers, the company typically wins around one out of three times, CFO Darren Wells told CNBC. But around 2019, Goodyear noticed it won roughly two-thirds of its bids for electric vehicle tires. A couple years later, Goodyear said it is winning more than 60% of EV tire bids. "Which kind of surprised me," Wells said in an interview. "I wasn't really expecting that we would hold that advantage over an extended period of time, but it's very clear there are fewer qualified bidders of all the tire companies and it's a much more challenging technology." It's one reason why Deutsche Bank has dubbed Goodyear, the largest U.S. tire maker, an "under-the-radar" EV play . Wells anticipates the auto industry's shift to electrification could be a multiyear tailwind for Goodyear. "The opportunity is very real," he said. "Investors are starting to see the opportunity that way also." Investing in EV tires Electric vehicles require different tires than traditional autos because EVs are heavier and have higher torque. EVs also have quieter engines and need to maximize how far the vehicle can go on one charge. That means EV tires need to be robust enough to deal with the weight and rotational force of the vehicle, and have lower rolling resistance and noise levels. Tire companies need research and development to create those technologies, then they need to update manufacturing processes to make the tires. "There are a number of different operations there that are affected, all of which have to be addressed with investment," Wells said. In Goodyear's latest earnings report, the company projected breakeven free cash flow in the current quarter as it looks to increase capital expenditures by $1.3 billion to $1.4 billion. In part, that investment will go toward building out its EV tire production capacities. Investors weren't happy with Goodyear's forecast, but the company sees the spending as a necessary investment to stay ahead of the auto industry's electrification shift. "We're still needing to make the investments," Wells said. "It'll be a little bit of a transition, but that's true for us, that's true for the rest of the industry as well." Shares closed Friday at $14.24, down 33% so far this year. On March 8, the stock hit a 52-week low of $11.64, and it remains about 43% off its November highs. It has a market value of $4.02 billion. In the next few years, Wells expects EV tires to grow into a dougle-digit percentage of Goodyear's OE business, which comprises 20% of the company's total volume. From there, Wells expects it will take another two or three years for EV tires to make up a more impactful portion of replacement tires, Goodyear's larger souce of volume. Goodyear in December launched its first replacement EV tire in North America . Goodyear estimates EV tire prices are about 30% higher than a traditional tire. Over time, management plans to bring more of that revenue to the bottom line, as costs to produce EV tires decline. "The challenge for us is, how do we make sure that the margin gets to be 30% more? By the time we get out two or three years and we're doing these things at scale, I think we'll be starting to answer that question," Wells said. Electric vehicle infrastructure Wells hinted at another area in which Goodyear could gain exposure to vehicle electrification. Charging infrastructure will be key to EV adoption, and the CFO said Goodyear's Tire and Service Network — more than 2,000 locations in the U.S. — could be a part of it. "We have a retail and service footprint of our own, so we think about what role that could play in helping keep electric vehicles and electric vehicle fleets on the road," Wells said. The company's venture capital arm in August also announced an investment in EV charging network and platform AmpUp . "We're looking to do everything we can to enable mobility going forward. We understand that that's going to mean tire products that work with future vehicles, but we also understand that there are other problems that need to be solved, including infrastructure that we feel like we can be helpful with," Wells said.

A Goodyear Tire and Service location in Madison Heights, Michigan.

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Even Goodyear Tire & Rubber's chief financial officer was initially surprised about the competitive advantage of electric vehicle tires.