Conti merger an opportunity to rectify past mistakes

The longest-serving Continental AG board member, Hans-Joachim Nikolin (55), leaves the company’s Executive Board at the end of July and its youngest member, Nikolai Setzer (40), will take over a combined tyre business and thus lead the company’s most successful and currently highest turnover-generating division. The company’s business unit structure has decreased at a management level to adapt with future requirements and now benefits the previously independently-led truck tyre division, which in many past years failed to meet expectations and suffered under the griping of Nikolin’s fellow board members Wennemer and Hippe. During that time, numerous threats were allegedly made to sell off the entire commercial vehicle tyre division should it prove unable to rapidly achieve an EBIT margin of or near double figures. Such threats placed Dr. Hans-Joachim in a very helpless position as yield-hungry analysts could have all too easily interpreted them as promises.

With well-chosen words Dr. Elmar Degenhart and Dr. Wolfgang Reitzle farewelled Nikolin from Continental’s Executive Board and wished him well as he embarks, as we believe, on early retirement with, it is thought, full pension entitlement – as can be read in the company’s 2011 annual report, Nikolin, as the longest-serving board member, has an “old contract” with very good terms; it is said it would take German Chancellor Merkel, with her annual income of around 280,000 euros, more than two years for her earnings to match Nikolin’s annual pension. So far, so good.

A great deal of hope was attached to Dr. Nikolin when he first joined the Board. Following the unexpected and sudden departure of Dr. Klaus-Dieter Röker, who by all accounts didn’t endorse the relatively rigidly prescribed closure of tyre plants, truck tyre specialist Dr. Thorsten Reese would most likely have been first choice as successor had he not been dispatched to a plant management position in South Africa several weeks earlier. In this way Dr. Nikolin, who had previously led the passenger car original equipment business with success, was given a chance. Further down the track, Nikolin developed a reputation as being unable to implement necessary hard measures. Employees in his division occasionally found prompt decisiveness and readiness to take decisions lacking. Internally, his reputation suffered following the end of truck tyre production in the company’s home town of Hannover, in part due to the way in which this was handled. Regarding this event it is admittedly unclear whether or not he had any sphere of influence. Yet despite any negative feeling against him, it is beyond doubt that, in terms of technology, Nikolin was well-regarded as a tyre specialist.

During the past ten years Continental’s commercial vehicle tyre business unit has not met with tremendous success. Nikolin alone cannot be reproached for this; rather, this results more from a questionable corporate strategy of purely focusing upon the highest possible margins. This focus saw Conti’s agricultural tyre business relocated to the Czech Republic and later sold to CGS. EBIT margins were actually not that bad, nor was the outlook for improvement, yet Conti no longer wanted to direct its energies into peripheral areas with turnovers of just around 100 million euros.
 
Nikolin was able to chalk up a success with the 100 per cent acquisition of the Conti-Matador joint venture truck tyre factory in Slovakia. However the strengths delivered by Continental’s factories were only able to be scantily implemented in numerous markets, most likely because powerful, investment-backed programmes were never implemented. For a long time – too long – the German company’s production fell behind and the firm placed particular sales emphasis upon trailer tyres, a product that could only realise weak profits, while it remained weak when it came to profit and image-boosting drive axle tyres. In the area of retreading and fleet business, to name only two examples, Continental remained just a follower.

Neglecting this business was a definite mistake. Using clever strategies, the German company strived to draw closer to end users and as a result its marketing and overall market organisation failed to develop to the extent it needed to. The weakness here lay in the company’s failure to set its ideas in motion; a case of easier said than done. And explanations given about wanting to “come closer to the customer” could largely be taken with a grain of salt, as those who said this all too often didn’t really know what a customer looked like.

Success in the commercial vehicle tyre segment requires more than just a good product, as product quality is expected as a matter of course. On top of this the company itself must be action-oriented and capable of getting things done, and it must know what things the market considers important; otherwise the company will be like a eunuch, always knowing exactly how everything functions yet unfortunately unable to achieve anything.

What message is being sent out regarding the recently announced merger? The highly successful, growing passenger car tyre business unit can quickly teach the commercial vehicle tyre unit that the formerly dominant cost-cutting measures are just one side of the coin, and the flip-side consists of growth and capturing new markets. The passenger car tyre business unit has a hard-hitting marketing and market organisation capable of implementing necessary measures in a practical way. This is a lesson worth learning.

The two tyre divisions’ merger should also go hand-in-hand with the insight that for a tyre manufacturer as large and ambitious as Continental the decision whether to keep or to sell the commercial vehicle tyre business unit was an absolute no-brainer. Think about it – future large business growth spurts will largely take place in markets such as Asia, Brazil and Russia. Yet in places like these, observers shouldn’t be deceived by what they witness in the virtually around-the-clock stop-and-go traffic in megacities such as Shanghai and Beijing. Upon exiting these metropolises and travelling on the growing network of well-built motorways, motorists find themselves surrounded mainly by trucks and buses and just the occasional passenger car. Who then wants to participate in such a market with a focus upon high performance tyres for the prestige car sector?

What applies to China is even more valid for India. Not only would it be impossible to be present in this particular market without a commercial vehicle tyre range; for the foreseeable future tyres for drop-centre rims also need to remain a part of any portfolio.

Things are going well for Continental in Brazil, yet it must be pointed out that Brazilian production is more or less tailored for North America/NAFTA rather than for conquering the Brazilian market with its almost 200 million potential customers. The country’s economy has enjoyed incredible progress in the last five to seven years and all future signs look positive. For 30 years now Michelin has also manufactured truck tyres in Brazil, along with OTR and industrial tyres, and now that the market is sufficiently developed Michelin has also built a passenger car tyre capable of producing five million tyres per annum in the near future; year-for-year this capacity will be increased by two to three million units until a final capacity of 15 million tyres a year is reached. 

It can be safely assumed that what’s happening at Continental is more than just a management reshuffle. Continental is on its way as a tyre manufacturer to become a truly global player with tremendous market potential in Asia, Latin America and Russia, and also in Europe and surrounding countries such as Turkey. But the company’s full tyre portfolio, not just its passenger car tyres, is needed for this to happen. Globally, only Michelin and Bridgestone presently offer a complete tyre programme. Due to financial reasons Goodyear was unable to undertake necessary investments in the OTR, industrial and agricultural tyre sectors and thus needed to withdraw from these areas. This wasn’t so much a strategic coup, rather the consequence of a prolonged crisis over many loss-making years that necessitated a tight pooling of resources without regard to long-term effect.

Continental has the strength and the technical and technological ability to catch up with its competitors. This won’t necessarily happen overnight or within five years, yet it will occur, and within a timeframe that strategically is very much possible to achieve.

In this respect, when considering the personalities involved and Dr. Hans-Joachim Nikolin in particular, it is foreseeable that the planned and hopefully soon implemented merger of the two tyre businesses is amongst the best news that the Rubber Group has heard in a good number of years.

klaus.haddenbrock@reifenpresse.de