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Michelin: Likely to Get Worse
Before It Gets Better
Overview Michelin is finding that the competitive landscape is changing. It is a pureplay
tire company, and has enjoyed a position of leadership in the two largest
arenas of Europe and the United States, with global market share of
19%. The company also has a super-premium price position, with its retail
prices 25% above the branded competition and 80% above the cheapest
competitor.
However, Michelin’s position is being threatened in both Europe and
the United States, as low-cost Asian (especially Korean) manufacturers rapidly
make inroads. The company is not well-positioned to counteract the
advance of the Korean tiremakers because of its uncompetitive cost base. In
an industry where labor cost is a key strategic lever and the raw materials
are commodities, 75% of Michelin’s production is in high-cost locations
(primarily western Europe and the United States).
The company’s stated strategy is to reduce costs by natural labor attrition,
but this tactic so far has resulted in headcount reductions of only 2%
per year. In our view, this “no pain” approach to a worsening competitive
environment reflects a lack of a pressing need to take uncomfortable decisions
given adequate earnings. We believe significantly worse numbers will
be needed before restructuring gets serious.
Contrary to what might have been expected, increases in raw material
prices over the past two years have brought about margin expansion in
most of the tiremakers through 2005. However, we have recently had a
spate of profit warnings from Michelin, Bridgestone and Goodyear, reflecting
the fact that it has become increasin ...