Michelin Looking to Cut Production Costs by 20 per cent

(Akron/Tire Review – Financial Times) Groupe Michelin is aiming to lower its production costs in Europe and North America by an estimated 20 per cent as it clamps down on inefficient development and manufacturing processes ahead of next year’s expected sharp downturn in the global truck market.

Michel Rollier, who took over at Michelin four months ago after the sudden death of Edouard Michelin, is accelerating the drive to cut costs after being forced this summer to issue the group’s second profit warning in a year.

In an interview with the Financial Times, Rollier said the group would invest €650m a year in its western European and North American factories, with a view to halving labour costs in its oldest plants and improving productivity through increased automation.

Michelin, which is estimated by analysts to produce some 75 per cent of its tyres in high-cost mature markets, has increasingly struggled to contain record raw material costs and rising competition from low-cost Asian tyre makers. Earlier this year the group cut its margin target for 2006 in an acknowledgement of the fierce pressure, which is likely to get worse next year when stricter environmental regulations are likely to hit truck tyre sales.

Rollier admitted that Michelin was no longer as competitive as its rivals and that it could no longer rely on price increases to buoy profit. “We have to be aware of the fact that we are lagging behind a lot of our competitors,” he said. “Growth stalled in 2005 and will not be very strong in 2006. The only way to recover is if we are very, very competitive.”

However, the Michelin boss insisted there was no need to launch a job cut programme today. Some 20,000 employees are due to retire before 2010 and, although Rollier refused to comment on how many would be replaced, it is possible that the number will now be lower than originally planned.

Rollier’s initiative will also mean a far more aggressive approach to product development, representing something of a cultural revolution at the company that invented the radial tyre and which has long prided itself on its reputation for innovation.

Rollier stressed that product innovation and performance would remain a key pillar of Michelin’s strategy. However he said, unnecessary over-performance would be eliminated. Development teams would have to adhere to strict cost criteria and product design would be simplified to help reduce production costs.

“In Michelin we search for the best performance of our tyres but we don’t always pay enough attention to whether this will be valued by the client or whether it has been achieved at the best cost,” Rollier said.

Michelin has no plan to cut the research and development budget, which at 3.6 per cent of annual sales is significantly higher than the average invested by French companies. But Rollier said this percentage would fall as the R&D budget would grow more slowly than sales.

The moves come as Michelin’s reknowned ability to offset record raw material costs by price increases to its customers is beginning to stall. Rollier said that while there was as yet no question of cutting prices, future increases would be lower than the 6-8 per cent achieved earlier this year. Michelin had to recognise, he said “that we can no longer recoup all of our higher raw material costs with price rises.”