Goodyear's global footprint would get strategic boost with Cooper Tire deal

AKRON—When Goodyear officials touted that combining it and Cooper Tire & Rubber Co. would yield $165 million in savings within two years, they were quick to note that this didn't include any manufacturing-related savings.

But during discussions with stock analysts and the press the day Goodyear's proposed $2.5 billion acquisition of Cooper was unveiled Feb. 22, it's clear that the combined manufacturing footprint will get much attention if the deal goes through. And with more than 50 manufacturing facilities worldwide and roughly 200 million units of tire production capability, there will be plenty of options to consider.

"While we didn't include any manufacturing synergies in what we released today, we do fundamentally believe that the two of us together can better manage and get increased productivity to deal with what we know is increased complexity in tire manufacturing and the tire manufacturing process," Richard Kramer, Goodyear chairman, CEO and president, said in a call with the tire trade press.

"Cooper has some locations in some very low-cost sources that offer greenfield expansion as well, so as we go forward, we know that we have opportunity to optimize our combined manufacturing operations as well."

Akron-based Goodyear itself operates 33 tire factories located across 20 countries on five continents, according to data collected by Tire Business, a sister publication of Rubber & Plastics News. That includes eight in North America, four in Latin America, 11 across Europe, seven in Asia and three in the Africa/Middle East Region.

For its part, Cooper has 10 total facilities, including three tire plants and a mixing/components factory in the U.S. Other wholly owned sites include a tire plant in Mexico, and one each in China, the United Kingdom and Serbia. In addition, it has two joint venture tire factories, one each in China and Vietnam.

Kramer told stock analysts in a separate call that Goodyear expects to benefit from expanded scale in both manufacturing and distribution. "We also expect long-term value creation in manufacturing as we look to standardize best practices across our combined worldwide factories," he said.

Combination makes sense

Kramer said that one of the aspects that made the deal attractive from its perspective is how combined the two U.S.-based tire makers can be more competitive in the global tire industry, and much of that is because of some of Cooper's recent initiatives. He pointed to Cooper's shift to premium products, the implementation of a number of successful manufacturing initiatives and the strong joint ventures the firm is partner to.

"I think the combination is one that certainly made sense from our perspective," Kramer said.

When Kramer first approached Goodyear about the proposed acquisition, Cooper officials weren't looking to sell the company, according to Brad Hughes, Cooper's CEO and president. But they also were tasked with representing the Findlay, Ohio-based company's shareholders, and saw the compelling logic that the combined entity could be successful going forward.

"We feel like it recognizes the great progress we've been making as a company, transforming into a consumer-facing company with a strong manufacturing footprint, which was only made possible by the great work of the Cooper team around the globe," Hughes said. "We also believe the two companies together will make a stronger, more competitive force in the industry, which is challenging. It's a global industry with a lot of competitors, a lot of new technology coming to the market, and bringing the two teams, the two companies, the two strategies together, we think we'll emerge as a stronger entity."

Analysts weigh in

"It doesn't seem they are going to shut the facilities, the three factories Cooper is running in the U.S." said Bret Jordan, an analyst with Jefferies L.L.C. "It seems more like a distribution synergy."

He said there could be some benefits down the line by transferring production between facilities with capacity.

Cooper has a strength in SUV and light trucks as well as a history of making private label tires, so Goodyear ultimately could see value in putting some of its molds in Cooper facilities to make both brands, Jordan speculated. The bottom line, however, he said is that he doesn't know.

"It's possible that Goodyear could move some volume to lower-cost facilities that Cooper's got in their portfolio. So I wouldn't be surprised if things move around," Jordan said. "I clearly don't have any visibility as to whether that's part of their initial strategy or not. I would image the first thing they are going to do is try to get some supply chain synergy, corporate synergy.

"And if they can move production around to markets where they can get lower costs for some of their lower end lines like out of the Eastern European business or move things around to where there's incremental capacity in North America," he said.

Stock analyst James Picariello of Keybanc Capital Markets L.L.C. also doubts Goodyear will move to cut production.

"This is a scenario where Cooper and Goodyear are going to have to produce as much as they possibly can for two years because there are supply shocks because the tariffs are so onerous that anything Cooper and Goodyear can produce, they sell. That's a bold-case, blue-sky scenario. But that's possible," he said.

"I don't think that now would be the time or even a year from now would be the time to explore any plant closures. I don't think that's part of the deal," Picariello said. "Otherwise they would have put it in (the announcement)."

Areas of opportunity

Kramer said many of the advantages the combined entity would realize in manufacturing, distribution and innovation will come in the U.S. and China, the two largest tire markets in the world, accounting for about one-third of industry value.

Goodyear currently has just one tire factory in China, with capacity to make 12 million units a year of passenger, light truck and truck/bus tires. Cooper, meanwhile, has one wholly owned and one JV factory in China, giving Goodyear a boost in capacity and exposure.

"In China, we will essentially double our presence in the consumer OE channel," Kramer said. "Unlike the U.S., the consumer OEM and replacement segments are similar in size in China due to the infancy of the country's car parc. Expanding our presence with OEMs, especially local auto makers, will give us additional opportunities to create pull-through demand in replacement markets, which is projected to grow quickly in the years ahead as the car parc matures."

Overall, the Goodyear chairman said the addition of Cooper's manufacturing assets, coupled with Goodyear's technology and distribution leadership, provide the opportunity to make operations more efficient.

"Over the long term, we expect the combination to facilitate improved management of product complexity and drive additional production efficiencies," he said.

Other possibilities include leveraging the combined manufacturing footprint to potentially implement specific plant roles to make sure the operations are used in the most efficient manner to deal with the increased complexity of the global tire business, according to Kramer.

Specifics will be made more clear once integration work begins post-closing. He said two items of particular interest will include increasing the supply of Goodyear high-value-added products and potentially expanding output at some of Cooper's lower-cost factories, including in Mexico and Serbia.

"For us, expanding onto a factory is something that gives higher returns on investment capital faster (than building from scratch) as the infrastructure is largely there already," he said,

Additional savings can come by leveraging Goodyear's own chemical facilities as a supply source for Cooper's tire plants. "I think that gives us the opportunity to re-capture some of the chemical supply that would otherwise come from third parties," Kramer said. "It's imperative we look at that.

"We also have a number of very good strategic relationships with suppliers, and we feel we will have the opportunity to leverage those as we add the additional volume that would come along with the Cooper facilities."

As Goodyear always does, as it looks closely at the business during the integration process, he said the main objective will be to determine how best to produce the tires its customers want. "We are looking at how we can utilize this combined footprint the best way," Kramer said. "The best way to make sure we deal with the increased complexity in the industry. The best way to make sure we're getting the highest levels of productivity. And the best way to make sure we're able to supply premium tires, OE tires, and all the tires.

"That's the work that we'll all be doing," he said. "Like I said, that's what Goodyear has always done, and we will continue to do that."