“Michelin – The BMW In The Tyre Industry”

Business newspapers in France and England are commenting on a paper from the french analysts Gaetan Toulemonde and Alexis Boyer both from DB Global Equities are recommending Michelin shares as a clear “buy”. The share price – at about 31 Euros at present – has, according to the analysts, the potential to rise to 50 Euros within 12 months. Michelin is seen by them as “the BMW in the tyre industry” with strong brands and an excellent brand strategy.

It is expected that Michelin will announce in a press conference at the end of February a turnover for 2002 of about 15.7 bn Euro and an operating profit of 1.1 bn Euro.

For this year the company is aiming for a turnover of more than 17 bn Euro and an operating profit of more than 1.2 bn Euro. The stock capitalisation at present is 4.

6 bn Euro.Michelin’s strategy has been focused for years on a significantly improved product mix. 5 years ago 60% of all tyres produced were bread and butter tyres, but this proportion has been improved.

Today, standard tyres account for about 45% and shortly this will come down to 40%. Under the leadership of Edouard Michelin, in recent years the Group has drafted its profit and loss expectations very precisely and has been able to achieve its goals. It is the declared target of the management to increase the operating profit from the current 7 to 7.

5% to 10% from 2005. This is easier said than done and market conditions can change overnight; for example, a possible war with Iraq could lead to much higher oil prices and higher costs for all other raw materials. On the other hand the automotive suppliers are facing in North America extremely fierce competition and the automobile companies General Motors, Ford, and especially Chrysler, are trying to get their suppliers to subsidise them again by forcing them to reduce prices.

In this climate it will become very difficult to increase prices, or even to ensure that recent price increases will stick. While Edouard Michelin and Michelin managers have more or less admitted that it could become very difficult to resist the price pressures, Goodyear managers and Goodyear’s boss Keegan told analysts during the Detroit Motor show that they could see no such risk, but were very confident that the price increases will stick. We will see.

As far as the American market is concerned Michelin is in a very good position. The company was strong enough not to renew its supplier contracts with GM North America because the prices demanded by GM would have left no profit at all for the tyre manufacturer.Bridgesteone has managed, for the first time since the disastrous Firestone recall, a slight profit in North America, but Goodyear is in deep water; the North American Tire Division is losing much money and is deeply in the red, as it already was a year ago, with the consequence that Goodyear made a loss of US$ 203 million as a group.

It will be interesting to see whether Goodyear suffered another big loss in 2002; it is expected that the company will present its figures at the end of February. And let us not forget Continental. The group has undergone a major restructuring and is now in good shape earlier than expected.

The problem is the tyre business in North America. Continental (General Tire) has suffered a huge loss of more than 100 million Euros in the biggest tyre market in the world.What all have in common is the need for better prices, but the automobile industry in America is not likely to allow that.

There are estimates that last year Michelin made a turnover in passenger car tyres of 8 bn Euros and an operating profit of 750 Million Euros (9.5 % of turnover), while the group managed a turnover in truck tyres of 3.9 bn Euros and an operating profit of 370 million Euros (also 9.

5 %).With other tyre segments the group has been successful but could not achieve the high operating profits of the passenger and truck tyre sectors. The division VIA MICHELIN still is making a loss in its early years, the group is losing money in the wheel business and making a slight loss in the retail field.

High reserves are available due to the possible shift of production to low cost countries like Poland, Hungary and Romania. About 20% of the European production capacity is in these countries and Michelin has the intention to raise this to 35% by 2005/2006. As a comparison, Continental has already shifted 45% of the group’s whole European production to low cost countries.

Compared with this Michelin has enough more potential.While all, or most, competitors are losing money with their truck tyres (or are very unsatisfied with the results) Michelin is aiming for an operating profit up to 16% of turnover. This is not unrealistic at all given the fact that the group managed to achieve good results in 1999 (15.

7 %) and 2000 (13.6%).Regarding the retail sector, Michelin bought Viborg in December last year, adding to their 1,200-outlet Euromaster network another 465 outlets, mainly in Germany.

As soon as the deal is complete the retail business will account for more than 2 bn Euros (at present, 1.45 bn Euros Euromaster, 570 million Euros Viborg). From a strategic viewpoint, the Viborg acquisition was very important because it gives the group a fantastic pan-European service network that no other competitor can match.

Michelin is far, far ahead.The only real “problem child” is the wheel business, which needs a fundamental restructuring that will cost 50 to 60 million Euros, or has to closed, which could cost even more. The decision is not that easy.