Analysts: Michelin/Double Coin positive, but questions remain

Following on from the news that Michelin has signed an MoU partnering with Double Coin and Shanghai Huayi to create a joint venture manufacturing Warrior brand light vehicle tyres in China, analysts have responded with cautious optimism. According to analysis published by Morgan Stanley, Michelin is already producing Warrior light vehicle tyres in China, via an existing joint venture with Double Coin, with exclusive rights on the Warrior brands in China granted by government-held Double Coin.

The bank’s take on the back story behind the latest deal is that Michelin’s ownership started at 70 per cent, but in 2009/10 Double Coin is said to have decided to renegotiate terms by 2012, when Michelin was set to lose the licensing rights.

As a result the analysts’ view is that “scope for an Asian acquisition by Michelin is diminished…as the new joint venture will allow Michelin to continue to fill distribution in China with tier 1, 2 and 3 tyres, consistent with its global strategy. In time, this aims at building better relationships along the chain, stronger pricing power and higher brand awareness.”

However the latest developments raise a number of further questions. Firstly the deal demonstrates how Chinese tyre makers apparently have much more of a say now that they use to. As Morgan Stanley’s report points out, “especially in their own market.” The previous structure granted Michelin 70 per cent of the joint venture initially, but now it is only 40 with the remainder split between Double Coin and its financial backers.

The second question mark is attached to truck tyre production. Currently Michelin is building a 1.8 million unit-strong extra capacity of its own in China. At the same time Double Coin is also raising its output. “Increasing competition could complicate future industry negotiations for further cooperation joint-ventures”, the analysts point out. But, bearing in mind the on/off nature of the two firms’ relationships – joint forget the two companies were writing legal letters to one another over an alleged trademark dispute not so long ago – it could also have the effect of helping insulate Michelin’s technology and production/marketing positioning should anything go pear-shaped.

And finally, further consolidation and government stimulus in the tyre sector could be on the horizon: “We think the government will push towards consolidation and stimulate R&D to improve industry pricing, which would increase competition with foreign companies.”

Related news:

• Double Coin First Chinese Manufacturer to Achieve US SmartWay Verification

• Shanghai Michelin Warrior Tire Shares Transferred

• Michelin to Invest 700 million euros in China Tyre Plant