Michelin Is Leaving The Competition Behind.

Turnover up (+ 2.5%), operating profit down (- 10.5%), and, in comparison to the year 2000, a net profit which is down by 28.

4%. Still, Michelin’s management was in a position to be pleased and confident, because last year’s economic circumstances were extremely difficult, not only in Europe but also in Latin America, and, last but not least, because of the September 11th situation, also in the USA. With these problems, however, the French coped remarkably well.

Early in the preceding year, they had already forecast a 6.2% to 6.8% operating profit, and with the 6.

6% figure they achieved, they were, so to speak, dead on target. This in spite of all the setbacks! Whilst the 2000 operating profit admittedly was 7.6% of the turnover, the 6.

6% figure realised is very good and unique in the tyre business; and, amongst the automotive supplier industries, no-one else can boast such a good result. Bridgestone, for reasons well known to all of us, could not keep up and, after the Dunlop acquisition, Goodyear so far has not managed to sort itself out and must show a loss for 2001. A cloak of silence should quickly be drawn over the Continental Corporation’s results, since a 250 million Euro loss is being forecast here.

Despite the fact that the Continental Corporation is reported to have done well in the truck tyre field, the company is, according to Deutsche Bank analysts, ‘in intensive care’ When viewed against this background, the Michelin results seem all the more impressive. The forecasts for this year, therefore, seem very plausible: an operating profit between 7.4% and 6.

7%, depending on the economic developments in the larger USA and European markets. The corporation is now benefiting from the fact that its management has never, at any point in time, sacrificed the future of the company in order to pursue some short-term goals, but preferred to patiently await more suitable circumstances, sometimes presenting its operations less favourably than might have been required. The Corporation is sticking to a very well defined strategy, as was made abundantly clear by Edouard Michelin, and his people are capable and well placed to imply any ramifications of this strategy.

The Divisions: Turnover And Profits.The passenger car and light truck tyre division clearly leads the race with a 7.982 billion Euro turnover – being some 50.

6% of the total turnover – and, with 711 million Euro, is contributing 68.4% to the operating profit. This corresponds to an operating margin of 8.

9%, and this despite the fact that, to a large extent, Michelin is an OEM supplier, a business which is not generally considered to be very profitable. This result was made possible also due to improvements in the product mix, both in Europe and in the USA, as well as to the introduction of higher prices in most important markets. Michelin intends to continue to pursue its plans for price increases, also for the expensive super singles, and these plans will be supported by its Formula I engagements.

The chances of gaining the World Championship, even in this year already, are not all that remote. The importance of composing the right product mix is shown by the fact that, as recently as 1998, 62% of all passenger car tyres were in standard S and T sizes, and only 30% were high performance tyres. The present ratio is 49% to 43.

4%. The larger part of the investments made in recent years – also in the past year – went towards adapting the plants for an increased production of high performance tyres. Truck Tyre Division.

Who, actually, is making money in truck tyres? Questions of this kind are usually being asked by the competition, the truck tyre divisions of which are running at irrecoverable losses. Michelin, for one, is making money here. This division’s turnover is 3.

915 billion Euro (24.8% of the corporate turnover) at an operating profit of some 343 million Euro, corresponding to a full 8.8% of turnover.

This was achieved despite the fact that, in the USA, the OEM market all but collapsed, whilst in Europe the replacement market was forced to its knees, and on top of all that, the Brazilian market was troubled by high currency fluctuation losses. Whilst, in Europe, price increases were successfully implemented, this policy has proved so far to be less successful in the USA, and the corporation will therefore have another go at it during the current year. The truck tyre division particularly shows that Michelin is out to do more than just sell tyres, since it is in a position to offer a complete programme which starts with new tyres and a highly reputable casing, followed by regrooving operations, (carried out or supervised by a well trained and efficient team).

Subsequently, the tyres may be handed in for retreading, either Remix mould cure in the Michelin plant, or precured Recamic by the franchise network, again followed by any regrooving operations which may be required. The tyre’s full life cycles are under Michelin’s care, which presupposes an efficient infrastructure. Michelin secures this infrastructure by means of either the Euromaster organisation or by collaboration with tyre dealers with a high standard of professionalism.

This is why it is to no avail when the competition tries to beat the mileage performance of Michelin’s tyres: it is the whole system that they are up against!Different Tyres, Different Activities.All that glitters is not gold. In the ‘Other Activities’ Division (which includes bicycle tyres, EM and airplane tyres, replacement market, automotive field) Michelin managed to generate a turnover of 4.

9 billion Euro, without, however, having an operating profit to show for it. On the contrary: minus 14 million Euro, or 0.3% of the turnover.

A lot of energy and dedication will have to be invested into attempts at transforming this money changing business into a division which is capable of showing a profit of some kind.Global Presence.Michelin, like Bridgestone or Goodyear, can be called a Global Player.

These days, more than half of the total turnover is realised outside Europe (47% Europe, 40% USA, 13% South America, Asia and the rest of the world). In Asia particularly, Michelin is out to get its business going. Most of the Asian turnover is, at this stage, still being realised in Japan, and the Warrior joint-venture is sure to eventually make Michelin the number one tyre manufacturer in the largest country in the world, in the not too distant future.

Two years ago, Michelin started restructuring its European business and this is going according to plan; some months ago, tyre production was started up in low-wage Romania (formerly Tofan) and as far as Russia is concerned, it can only be a matter of time before the French will start to build their tyres there, too. For Michelin, this is a solo project, being run without a Russian partner, and this will make it a hard nut to crack for the competition. The most impressive progress, however, is being made on the largest replacement market in the world, the USA.

They are tackling this market in both the passenger car tyre and the truck tyre field, not only with the Michelin brand, but also with their other flag brands BFGoodrich and Uniroyal, which has enabled Michelin to establish a very stable and competitive multi-brand strategy. Nothing, it would seem at this moment, can stop these French. So, at the beginning of last year, Bandag boss Martin Carver waged a fight with Michelin, to be fought out in the field of market and marketing matters, as well as on subjects of legal wrangling.

Carver may have assumed that Michelin would be a push-over, but Michelin took up the challenge, and granting retreader Bandag any concessions whatsoever is definitely out of the question. Bandag’s management has already started to complain about the high legal costs and would probably be relieved if the fight could be swiftly brought to some conclusion or other. However, no such signals were received from Clermont-Ferrand or Greenville.

We will have to wait and see how matters develop from here.Prospects.Michelin seems decided upon considerably strengthening its relatively weak presence in Asia by the year 2005, and is aiming for the number one position in China and other Asian countries, and, what is more important, is intending to have in place, by the year 2005, the foundations for the generation of an annual operating profit of 10% of turnover.

Michelin has, almost like no other company, continued to invest in Research and Development, and last year this amounted to all of 702 million Euro. This, of course, is paying off in that Michelin is proving to be better placed than any other comparable competitor and the prospects for the French to increase the distance between themselves and competition can justly be called favourable. Moreover, they have initiated a whole series of very promising collaborations – among others with Bosch and TRW, and with Goodyear, Sumitomo Rubber Industries and Pirelli for Pax – and these are beginning to pay off too.

The much discussed economic situation is now turning in favour of the tyre producers because raw materials have in recent months become much cheaper, which, however, does not show in the results until some 6 months after the lower prices are introduced on the market. One can only agree with Edouard Michelin’s analysis that his corporation has, during the last year, managed to strengthen its leading position under very difficult economic circumstances..