Analysts Welcome Michelin’s Plans to Cancel Mexico Plant

A few days after the news that Michelin was walking away from earlier plans to build a new factory on a Greenfield site in Mexico, financial analysts have lauded the decision as “a wise move.” Michelin initially announced its plans to invest up to $740 million by 2014 in a second passenger car and light truck tyre plant in Mexico last year. Construction was due to begin in late 2008, the production line was expected to start running in 2010 when output would begin towards its 15 million passenger car tyres-a-year target.

The strategy here was believed to be for Michelin’s management to use significant natural attrition of the company’s North America work force to transfer production from the US to Mexico, where labour costs are reportedly four times than in the US.

However, this plan was based on growing consumer demand in the US. 12 month’s later the market condition is significantly different. This is how Morgan Stanley analysts characterise the current US tyre market: “OE production is collapsing, consumers are trading down and people are driving fewer miles. Longer-term, the focus on fuel economy will work in Michelin’s favour as it has spent billions in R&D and fuel saving technologies…[But]…cancelled capacity addition is a sign of the times.”

From their point of view the North American tyre market is under enormous pressure: Americans drove 42.1 billion vehicle miles less in the first half of 2008 compared to last year, they point out. Meanwhile the North American passenger car OE market is reportedly down 12 per cent year-to-date, while the replacement car tyre market is down 1.7 per cent.

In addition Deutsche Bank analysts read the move as a signal that Michelin “prioritizes on Asia to build capacity, since growth potential is much higher,” citing the example that the group still exports tyres from France to China. However, these analysts are similarly pessimistic about the prognosis for the North American market: “Despite a weak US market (replacement markets are at the level reached five years ago), this decision tells us too that Michelin’s management isn’t expecting a volume recovery.”