French manufacturer takes 10% stake in Hankook (Update)

Towards the end of January, news broke of a partnership agreement between Michelin and Hankook Tire, whereby the French manufacturer took a 10 per cent stake in the Korean company. The deal was signed in Seoul by Hankook Tire president Choong Hwan Cho and Michelin Asia-Pacific president Jean-Marc François and, according to the official communiqué, the purpose was to allow the companies to exploit synergies in a search for common opportunities to develop their respective positions in the tyre market.Talks have been on-going for several months and the two companies will be co-operating in the areas of R&D, manufacturing and distribution, although exactly what form this co-operation will take is still under discussion.

What is known is that the agreement means that Michelin will license its PAX system to Hankook and that the Korean company will manufacture tyres for Michelin. The companies will also optimise their distribution in certain markets.The purchase price of 10 per cent of Hankook’s share capital was not formally revealed, but an estimate, using the share price at the time of the agreement, suggests that it would be around US$33 million.

The shares will be purchased on the stock market.If at first you don’t succeed… This is not Michelin’s first venture into Korea; back in 1987, it formed a 50/50 joint venture company with Korean firm Wuon Poong, under the name Michelin Korea Tires. Wuon Poong, which was part of the Woosung group, had a car tyre factory at Yangsan and the plan was to produce between 5,000-6,000 car tyres daily under the Michelin brand name.

Michelin would provide technical know-how, which had previously been supplied by Yokohama.The fact that the operation was a joint venture (JV) was a novel experience for Michelin, but it was the company’s first manufacturing deal in Asia of any kind and it made sense to have a partner who knew the vagaries of the various markets. Korean laws prevented foreign companies from holding majority stakes in such ventures.

It may have been also that Michelin felt that having a Korean partner might ease the way to tap into the growing Korean original equipment market. Whatever the reason, Michelin Korea Tires represented the French company’s first step in Far East manufacturing.The arrangement lasted for four years before it was terminated by Michelin.

The official reason given was profound differences of opinion on the strategic development of the JV, although it was widely believed that product quality was at the root of the problem. Whatever the reason, the venture ended officially on March 31, 1991 and Michelin formed a sales company to look after its interests in Korea. Michelin’s stake in the company was taken over by Woosung, which manufactured tyres under its own name.

Since then, Michelin has made progress in Asia and has a factory and technical centre in Japan, factories in Thailand and the majority interest in Shanghai Michelin Warrior Tire Co in China. Sales companies exist in many other Far Eastern countries and Michelin’s Asia-Pacific regional HQ is sited in Singapore.What’s in it for Michelin?For Michelin, the objective is clear; the company has made no secret that Asia is its weak spot as far as tyre sales are concerned.

The company claims an overall share of 19 per cent of the world tyre market, but in Asia, its share is only about one-fifth of this figure. For a company that is a global player, such a situation is unsatisfactory, especially as Asia accounts for some 20 per cent of the world replacement tyre market, with volumes in excess of 132 million units.Michelin has made growth in Asia a main priority, particularly in those areas where the OE and replacement markets are growing, notably China and South Korea.

The company has already made inroads – indeed, in some cases much more than that. Take China for example; the Michelin group claims to be number one in the car tyre replacement market with a share of 30 per cent, much of which is due to sales of the Warrior brand. At the time of writing, Michelin’s full-year financial results are yet to be published, but figures for the first nine months showed that sales in China of Michelin brand car tyres increased by 20 per cent.

It is expected that the Michelin/Hankook agreement will be mainly concerned with car tyres, but Michelin is very active in the field of truck tyres. In the company’s third quarter figures, it was noted that the group performed very strongly, particularly in China and Thailand. Michelin’s sales of truck radials grew by nearly 11 per cent in Asia in the first nine months of last year and the Asian region is extremely interesting, representing almost 40 per cent of the global market for truck tyres, according to Michelin.

In light of developments in the Korean OE market – which is growing both in terms of domestic sales and in vehicles for export – if Hankook is to produce Michelin tyres, then logistics and costs will be simplified for the French operator.Spending US$33 million on shares is a lot cheaper than building a factory from scratch, not to mention a lot quicker, and one assumes that the manufacturing levels will be flexible to cope with what Michelin no doubt hopes will be an increase in market share and therefore volume. Hankook already supplies tyres to the major Korean car manufacturers and has a good reputation in its domestic market.

And for Hankook?How will Hankook benefit from the new arrangement? We have already said that it will be granted a licence for the PAX system and this could well benefit Michelin too as the technology reaches a wider audience.Producing tyres for Michelin will obviously help in optimising production at Hankook’s factories, while the technical and R&D co-operation can only be beneficial. Hankook has ambitions to grow as a major player and the company says that this year marks a change of strategic direction, from being a manufacturing-oriented company to one that is market-driven.

The intention is to centre on delivering value to customers, distribution channels, shareholders and employees. Once again, the company can learn much from its new partner. Until the details of the agreement are ironed out, we can only speculate at what might happen, but the agreement in the areas of manufacturing and distribution begs the question will Michelin make Hankook tyres for regions such as the USA, or at least give Hankook access to its distribution channels? To be fair, nobody has mentioned the possibility of Michelin manufacturing for Hankook; any mention of manufacturing in the new agreement has concentrated on the other way round.

Whatever happens in the future, the deal looks to have advantages for both sides. Hankook is no minnow, although it is many orders of magnitude smaller than Michelin and the Korean company has a good presence (both manufacturing and sales) in the geographical area where Michelin wants to grow. And this time there should be no quality concerns for Michelin.

Hankook has gone on record as saying that it wants to become one of the world’s big-five tyre manufacturers and that it wants to have a six per cent share of the world tyre market by 2005. Obviously Hankook feels that an alliance with Michelin can help achieve this, or at least go a long way towards it.The French company is strong everywhere except Asia, where it is determined to do better.

Some might say that any improvement in sales for Michelin in the region might be at the expense of brands such as Hankook, which has a Korean market share of over 40 per cent. That may well be so, but if Michelin is determined to achieve growth in Asia by any means, then it makes sense for Hankook to be part of it. As the old saying begins, better to have them in your tent… .