Analysts: Michelin trying to recover lost market share with Tigar expansion
Michelin is aiming to recoup part of the market share it has lost in the last decade by pushing up tyre production and sales volume across the board. That’s the view of financial analysts at Morgan Stanley who described the company as “swimming in red ocean.” Referring to the 170 million euros the company just announced it is putting into increasing budget tyre production at its Tigar plant in Pirot, Serbia, financial analysts described the funding as “a small investment for Michelin”, but a “big clue for investors.”
If the florid hyperbole didn’t give it away yet, these financial analysts haven’t exactly welcomed news. Not because the company is overstretching, or because the concrete financial figures don’t stack up, but because they see it as a deviation from the company’s core strengths: “We believe the current Michelin strategy doesn’t play to its most valuable assets: brand and technology. Competition in the entry-level segment is driven by price.”
The analysts point out that a plethora of Asian competitors have flooded the markets with tyres over the last few years. And these companies are supported by fast-growing local markets and economies, not to mention low manufacturing costs. And most observers, including Morgan Stanley, expect their market share to continue to increase in both their home and developed markets. Morgan Stanley’s investor’s note (which was published 3 April) even goes as far as saying that “a number of them could eventually climb the rankings and challenge the position of established premium manufacturers – as Hankook is successfully doing.”
If Michelin generates 60 per cent of its pre-tax profits (EBIT) from just 25 per cent of its sales (he combination of premium car tyres and the specialty (mining, agricultural and industrial) business, shouldn’t the company focus on the faster-growing, less capital intensive and more profitable niches rather than potentially diluting margin through capacity investments in entry-level tyres?, Morgan Stanley asks on behalf of its investors. Their point is that it is a crowded and structurally low-value added segment.
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