Goodyear Fires 700 In Akron (Update)

Television broadcast trucks pulled up in front of the headquarters in Akron to film the misery of those affected and to interview dismissed staff. Dismissed staff reported that the Goodyear management had acted with circumspection. Medical services staff had been beefed up, for example, to offer speedy help in the event of anything from fainting spells to heart attacks, and more than a few of those dismissed felt particularly humiliated to have to clean out their desks beneath the watchful eye of the “Goodyear Police”. In some cases -it is said- , this was after decades spent in the manufacturer’s employ. The Goodyear North America division had already suffered considerable losses in 2001, which ultimately led to a group-wide loss of $203 million. Goodyear is ailing in its home market, where it has shown no improvement since 1999, a year in which earnings were very weak. Indeed, contrary to any improvement, the weak returns led to heavy losses in North America.

The turnaround was supposed to occur in 2002, but the results fell utterly short of the mark. In particular, actual performance reportedly fell a full 8 million pieces short of the company’s ambitious objectives for the American spare-tyre business. This figure, however, is offset by a surplus delivery of around 2 million original equipment tyres, resulting in a bottom-line deficit figure of “only” around 6 million tyres by the end of the year. If these rumoured figures are anything close to being correct, then it also turns out that Goodyear’s “Flight to Quality” – triggered by the disastrous Firestone recall in 2001 – never got off the ground (which, incidentally, was not the case for the Michelin Group). It was bad enough that despite extremely advantageous conditions, the group suffered a great loss in terms of quantities of tyres sold. What was even worse was the fact that chiefly with its flag brands, Goodyear and Dunlop, the group had fallen short of its sales objectives in painfully obvious fashion. In the view of top management, the North American organisation had also lost contact with its dealers in many cases; plans mentioned to date feature swift work to remedy this handicap. How a team which has again been drastically reduced in size is to accomplish this, however, remains a mystery. A multitude of other observers are asking themselves the same question as well. Indeed, it seems as if the general practice is for major analysts’ conferences (Keegan plans an analysts’ panel in February at which the Goodyear strategy is to be presented) to be preceded by measures like this one.

Still, even analysts who consider the latest round of dismissals to be a good decision are quick to point out that costs are not Goodyear’s only problem; an additional difficulty is that acceptance of the brands is too weak, and successes are needed in this area as well. To date, the only accomplishment in this regard has been talk; the successes themselves have yet to materialise. As Sam Gibara always maintained: “The strategy is in place!” According to the analysts, though, there has been an uninterrupted shortage of palpable ideas. Quite to the contrary: a glimpse at recent history shows that Goodyear’s announced measures would never have been realised, and that consequently, the restructuring plan should be viewed with scepticism. Moreover, analysts have also been completely taken aback by the fact that Goodyear’s management simply downplayed fears over the company’s liquidity, claiming there was a plan in place to solve this problem as well. Whether this plan also entails a bid to secure new funds through the capital market will be known after the analysts’ conference with Keegan in late February/early March. How greatly performance hinges on good relations with the retail world in the USA was impressively demonstrated by John Lampe, Bridgestone’s charismatic leader. While analysts harboured near-unanimity that there would be a landslide shift in market shares to the detriment of Firestone and to the benefit of Michelin and Goodyear – indeed, the analysts’ opinions were so deeply held that it must have seemed as if they were plagiarising one another – Lampe criss-crossed the country fighting for every major Firestone customer. In the year after the recall, a review of the situation revealed that no authorised Firestone dealers, not a single one (!), had turned away from the company and had maintained the affiliation instead. In the end, every authorised dealer profited as today Firestone and Bridgestone are marching forwards just as mightily as they were before the recall.

Even if you consider ‘charisma’ or ‘charismatic’ to be words that should be used sparingly, you cannot help but think in these terms when it comes to Lampe. Anyone who witnessed the utter frenzy with which this man was greeted by several thousand dealers when he was in Las Vegas cannot help but acknowledge he has these qualities. Lampe simply knows what customers look like and how customers “tick”, and he knows how to win them over. And those who consider Lampe’s image on today’s American tyre market to be exaggerated must nevertheless agree that the Bridgestone/Firestone team trusts in its leader and follows him nearly unconditionally. And that’s what counts: not exerting pressure but performing the work of persuasion. Along with the cost-cutting demanded of him in times of dire need, Lampe also had other measures at the ready, banking on the fact that a team with the passion to fight would regain lost ground. But what will the measures now introduced in Akron and other parts of North America bring? It is simply hard to see how business in North America can be accelerated when the only measures to be seen are cost-cutting efforts. What will this accomplish? All of the savings must be seen in relative terms, given that Goodyear’s turnover in North America is around $7 billion. In this context, what is, relatively speaking, a great deal, and how much is relatively little? If one assumes yearly saving of around $60,000-$70,000 for each fired staff member, in purely mathematical terms one arrives at a savings of less than $50 million. This, combined with other savings measures, is to save Goodyear $80 million, according to the company. To begin with, though, this must be viewed in light of periods of notice and severance pay, so that the move will have next to no effect during this year; Goodyear itself says that reserves of $75 million were required to offset the costs associated with the measure. Whether Thursday January 16th brought a further cut in the research and development budget cannot be accurately determined yet. The question is how the group, with even fewer employees – after all, there has been a steady stream of dismissals in the course of the three years since the world-wide hiring freeze was introduced in 1999 – expects to strengthen relations and contacts with its dealers?To date, no convincing concept has emerged with which North American sales could be enhanced, or that could at least bring a stop to the erosion in market shares. Qualified experts with the requisite background knowledge trace the current problems to excessive concessions made during trade union negotiations in 1997, when a six-year contract was signed demanding a much greater financial sacrifice from Goodyear compared to the competition. Whereas their competitor Michelin operates only a handful of factories in which unions set the tone (the share is probably around 20 percent), this figure is much higher at Goodyear (some 75 percent). The objective was to offset these higher (as it now appears, too high) costs by achieving better sales prices, but that didn’t work. A company like Goodyear cannot unilaterally insist on higher prices, not even in their own domestic market; instead, pricing depends upon what competitors, such as Michelin and Bridgestone, decide to do. At the other end of the scale, the pricing strategy for Kelly tyres and for the many private and house brands is not shielded from how competitors such as Cooper, General, and indeed Yokohama, Toyo, Kumho and Hankook position themselves, all of them in search of one thing: winning market shares! Not only did the major competitors Bridgestone and Michelin secure a foothold in the market: they even added to their own market shares. The same holds true, incidentally, for Cooper and Pirelli.

To date, the name of the loser has been Goodyear, with all of its brands. The next round of trade union negotiations begins in April. From today’s vantage, it is highly likely that factories will be closed in North America and more productive capacity transferred to low-wage countries in Latin America; the situation may leave no alternative to a measure such as this. The fact that people are already ranting on the Goodyear message board, calling for a boycott of company products hailing from low-wage countries, is a sign of emotion but not of rationality. Moreover, America’s consumers in particular exhibit extremely rational conduct the moment the question becomes paying a dollar more or a dollar less. The maxim is: yes, my shirt was made in China, I would have preferred to buy American-made, but it wasn’t available in my size. Again and again, the claim is made in the group’s written materials – Goodyear has the best brands, the best products, the best distribution and the best people! If this were anything close to true, then the group wouldn’t just be with its back up against the wall but even tottering on the brink of ruin. As for the image of the brands themselves, a statement and analysis by J.D. Power is certainly more telling than statements issued by the group itself. And for years it has remained the same: the name of the outstanding tyre brand is Michelin, even in the USA. Why? In 1999, Goodyear took over Dunlop, and what did the group get for it? The Goodyear Tire & Rubber Company had originally offered the negotiating partner Sumitomo Rubber Industries (SRI) in Kobe less than $200 million for the Dunlop activities and in the end wound up paying more than $900 million in cash. To this day, a photocopy of the check, made out for the precise amount, is making the rounds through the group. And the cash payment wasn’t the only thing which satisfied the Japanese. On top of that, the deal gave them an additional 25-percent share in the Western European Goodyear tyre activities. With the exception of the four German Dunlop factories in Hanau, Wittlich, Riesa and Fürstenwalde, what Goodyear received in the bargain were only Dunlop factories in a miserable condition; a few of these have already been shut down completely, which has no doubt led to extra costs of some $200 million. And the restructuring (in other words, closure, of obsolete Dunlop factories) is probably still in progress anyway. The assumption is that one Dunlop factory in North America is due to be shut down soon. At the time, a leading manager at the group cast the matter rather drastically: “We bought nothing but shitty factories, with the exception of the German ones, and even though we restructured on a massive scale, we’re still playing catch-up, and there’s no end whatsoever in sight.” Actually, it is puzzling why Goodyear got involved in purchasing factories in high-wage countries to begin with. The job can be done differently, and better, as the acquisition of Debica and Sava demonstrate. By far the largest and most efficient Goodyear factory in the European group network today is located in Debica, Poland.

After the group had invested approx. $50 million there, the rest was added over the years from profits generated by the Debica factory. For considerably more than $1 billion, then, the purchase of the Dunlop brand yielded nothing more than a brand which is fairly strong in Germany and England alone. Nowhere else in Europe, and certainly not in North America. Was the investment justified, and did it pay off? Only a year and a half ago, in an interview with the Neue Reifenzeitung, Sam Gibara justified the acquisition by arguing, among other things, that the European base needed to be strengthened in order to keep pace with their major competitor Michelin, even in distribution, over the long-term, and to respond to Michelin’s distribution base, which was already strong anyway. For this has always been the motto for success at Goodyear: given the right product, the right costs and the right distribution, success is practically automatic. What this mantra also reveals is that, during the Gibara era, the finance people had a total claim on power, letting no more than a handful of factory people join in. During recent years, marketing executives have not been permitted to make any fundamental decisions; instead, they have always been voted down by Finance! As for the rest, they had to be content with the repeated pointing to “great brands and great distribution”, which sounded like frightened children whistling in the dark forest. The major brands do not succeed of their own accord, and without investment their value drops. And distribution? Here, too, there is some distance between set standards and reality. In France, Goodyear-Dunlop is taking pains to transfer its own retail activities to franchising to avoid perpetuation of undesirable and unaffordable loss; in England, at the end of 2002, 33 outlets of the Hi-Q/Motorway retail chain were sold off. At the same time, Michelin is purchasing the Viborg Group, at a single stroke increasing what is already the largest retail organisation in Europe, Euromaster, by 560 million Euros. A lead such as this makes it absolutely impossible for competitors to catch up. Anyone operating a fleet business or a leasing business throughout Europe cannot avoid dealing with Michelin and its retail chain, Euromaster/Viborg. In the USA, it was claimed that, thanks to the strong Goodyear distribution network, the market share of Dunlop tyres would expand within five years’ time from 1-1.5 percent to 8 percent. This turned out to be just as much of a flop as Goodyear’s prognosis at the time: that turnover would expand to a figure of $20 billion by now. Yet group turnover was no lower five years ago than it is today. The measures currently announced demonstrate the entire magnitude of the pressure to which Goodyear’s management is subject. A downgraded credit rating and continuing weak business performance in the USA are further restrictions on the group’s ability to act.

The problems affecting Goodyear Tire & Rubber Co. are not simply, as the management says, very severe and yet solvable. Under certain circumstances, Goodyear – already suffering from high debt and a deficit in its pension fund – would need to generate no less than $2.3 billion in cash by 2004. And how they expect to accomplish that remains a mystery, for in reality the situation, described as “difficult and manageable”, is quite dramatic, and the management is in a race against the clock. People will need to be prepared to hear the group’s managers suffix their optimistic statements by adding, “if we still have enough time”. It is already very American to hear claims, at this stage, of having the best people in the tyre industry – who are then sent home after 20 or more years’ service to the company, only to be replaced by others with no experience whatsoever in the tyre business. As much as one may hold Goodyear in high esteem: one thing the company does not have is the best people in the industry! But it is quite sufficient to point out that the Goodyear staff is in every respect able to keep pace with the staff of their currently far more successful competitors, Michelin and Bridgestone; Goodyear employees are no better and no worse. But one has to see the actual drama in the fact that this group appears to be forced to fire people who have devoted the passion of 20 or more years’ work to Goodyear, people who were raised as members of the Goodyear family and who on a daily basis demonstrated an amazing sense of loyalty. It should be noted here that employees neither failed of their own accord nor due to poor performance. They were “just” made the victims of a business policy which has turned out not to have succeeded, and they were made the victims of a strategy which has not remained sufficiently sound. But even these fired staff know that Keegan & Co. are attempting to fix a mess which they personally did not get the group into. No matter how often Gibara announced, “the strategy is in place”. This strategy failed to deliver the turnaround so ardently longed-for.

As one could read in the Neue Reifenzeitung as far back as two years ago: “Goodyear in the year 2000: we were hoping for architects, but so far we have only seen cost-cutters.” (www.tyrepress.com- look Infopool/Reports/Tyre Industry). While Goodyear is fighting for its very survival, Michelin enjoys the unbridled wooing of the financial world. Just days ago, Michelin was again named “The BMW of the Tyre Industry”, and the stock has been considered a clear “buy” for quite some time now. The management reiterated back in January that the objective it had set for itself had been reached; which was an EBIT of 7.5 percent of turnover. By the year 2005, the French want to have their EBIT in the double-digit percentage range. And under the most pessimistic assumptions, the Michelin pension fund could turn up a deficit of less than $50 million; that is extraordinarily solid. Now that the order of magnitude of between 7 and 7.5 percent has been reached on a repetitive basis, thereby demonstrating sustained profitability, the Michelin Group has won over the trust of the financial world. Whereas the same analysts advise caution where Goodyear is concerned, pointing out that for years the management has consistently promised a great deal and in the end has failed to “deliver”. They never did accept references by Goodyear’s management to difficult global economic conditions, a poor business outlook, bad currency parity figures and more, anyway. What is really at stake was pointedly put by the analyst Rod Lache of DB Global Equities in New York: to be able to operate in the same league with their competitor Michelin, in terms of the latter’s profitability, Goodyear would be forced to realise savings of $700 million. Not a rosy prospect for Goodyear and its staff world-wide. klaus.haddenbrock@reifenpresse.de