Michelin North America Inc. is the most profitable tire company in the North American market, a position it intends to retain.
Michelin has succeeded despite operating in an environment of record raw material and energy costs, reduced demand in major consumer and commercial markets, and increased competition from lower-cost countries.
Leading the way for the tire maker is Jim Micali, who has been chairman and president at Michelin North America since 1996. During a media event in Greenville in December he talked with Brad Dawson, Rubber & Plastics News senior reporter, about Michelin´s challenges, difficult decisions and successes as it tries to thrive in a highly competitive market. This is an edited version of that conversation.
Even with all the challenges Michelin and the tire industry are facing, are you generally happy with the state of your North American tire business?
Yes, that is to say I feel very good about the results that we´ve accomplished. We´ve been the most profitable tire manufacturer in North America for the last several years. That´s due to the efforts of 22,300 employees. We´ve done I think a very capable job in dealing with some very difficult issues. You see the raw material (price) increase, and you see the competition coming from Asian imports. It´s a reality, they´re very capable competitors, and we need to face that. And we will.
Michelin has been able to gain or retain market share in most sectors, despite a down market. How did it do that, and what steps does the company take to meet that challenge?
You really have to look at it product line by product line. On the truck side, we work very hard to develop that cradle-to-grave approach: new tires, retreading and information services. If you can provide that bundle of product and services to a fleet through a strong dealer network, then even in a down market, you´re going to be able to hold your customers and serve them well.
In passenger and light truck, like other tire manufacturers in North America, unfortunately we´ve had to rationalize some of our production with the closing of Kitchener (Ontario, tire plant) and a downsizing of Opelika (Ala., tire plant). It was because we were uncompetitive at the lower end of a declining market. We really had no other option, as difficult as it was, than to close one facility and downsize the other. But that´s permitted us to concentrate on those segments where the consumer recognizes the value of a product and is willing to pay for the value proposition that hopefully Michelin brings them. That´s why I think you´ve seen some significant progress on the V and Z segments.
You mentioned your difficult decisions in the past year regarding capacity. Do you feel you are where you need to be capacity-wise to meet future needs in North America?
Again, let´s go by product line. On the earthmover side, we´re certainly short of capacity. So we´re adding capacity in Lexington, S.C. Michelin also has a small earthmover plant coming online at the end of 2007 in Brazil. So there, it´s a case of how quickly can you get the product out. We´ll do our best to ramp up those facilities just as soon as we can.
On the truck side, there again, we see substantial growth. You´ve heard about our X One capacity in Waterville (Nova Scotia) that we´re adding. You´ve heard about our retreading expansion, both in Covington, Ga., and in Queretaro, Mexico. There, too, we´ve got some good growth initiatives, we need to add some capacity and we´re in the process of doing it.
On the passenger and light truck side, we´ve got some selected Michelin capacity increases here in South Carolina. On the Uniroyal, BFGoodrich and private brand side, we have a three-year labor agreement we signed with the (United Steelworkers) in July where we´ve said we´re going to invest $100 million in those facilities and we´re not going to close a facility for the life of that contract. So, with the new labor agreement that we have, and with the capital expenditures that we´ve devoted to those facilities, we should be able to hold the line.
That´s where we are for the next three years. Now, the employees in those plants have the success of those plants in their hands. If we do a good job, we apply the agreement the way it´s supposed to be applied, we make the productivity improvements we´re supposed to make, we spend the cap ex wisely, then we should be just fine. If we don´t, then obviously we´ll have to revisit the situation; the competitive landscape will require us to do so.
How important is it for a company-for different reasons, whether it is costs, service or public relations-that makes tires for this market to manufacture in North America?
Over time, I believe you´re going to see logistics costs continue to trend up. While we would all like to have fewer SKUs, I´m not so sure that will be the case. As the auto industry continues to differentiate, try as you might, it inevitably leads to more SKUs on the tire side.
One would like to think that all other things being equal, manufacturing in your home market, you´re closer to the market, your logistic expense ought to be less, you don´t have currency fluctuations to deal with and your supply chain isn´t as long. On the other hand, the labor component of your overall cost structure gets so out of whack that it overrides all those essential, normal benefits you would have in manufacturing in North America.
So it´s an equation that needs to be understood and communicated to everybody at our company in order that we truly appreciate the challenge before us. If you can keep the production costs reasonably competitive with the imports, if you execute well with delivery, you should win. But you´ve got to be willing to face that issue and address it, and it´s an issue that has a medical active and retiree component to it, and it´s got a productivity component to it. You have to look at that whole cost base and figure out how you can become more competitive. And if you´re willing to do that and you do it, you can carry the day.
Given where your competition is right now in terms of labor, how satisfied are you to not only have an agreement in place, but one you thought was fair at the time given some of the challenges you face?
We felt we entered into a fair agreement with the USW in July, and we still think it was a fair agreement. I really don´t know the specifics of why Goodyear does not have an agreement with the USW. Part of it may be that we´re in a different situation in the sense that we have three unionized facilities and they have 16.
(Note: Goodyear and the USW settled the strike and union members at 16 North American sites returned to work Jan. 2).
Do you have to treat the cost problems you´re facing as permanent, and how do you address the situation if it keeps getting worse over time?
I´ve been in the tire industry for 29 years, and I don´t know that I´ve ever seen raw materials go up 86 percent in five years. I´ve never seen $3 gas. In terms of down markets, this has to be one of the top two or three down markets in my 29 years. While we can look at this in some ways as, if not a perfect storm, close to a perfect storm, that´s why you come to work every day, in order to figure out solutions to these problems.
While some of these don´t have perfect solutions, they can be dealt with if you´re willing to be innovative and creative. Some of it is just plain hard work. But it´s doable. You can manufacture profitably in North America. It can be done. We are absolutely convinced of that, and we´re going to make it work. But it requires a commitment from the entire organization to take a full look at what changes can be made or must be made in order to get you where you need to be.
You look at North American industry today, there are industries that didn´t adjust and industries that have been demolished. There are very few textile manufacturers left today in North America. Yet some industries are very profitable and successful because they were willing to adapt. You look at the automobile industry today. There are some companies that are making substantial profits in North America. So it can be done.
The private and associate tire brand market has been in decline. Do you see this trend continuing, and how does this affect your role in it?
The mass market/private brand sector has gotten smaller. We´ve lost share, some of it strategically, some of it because we had difficulty in meeting the low-price imports. The question is at what rate will the mass market continue to decline. Part of the answer to that question lies in what happens with the economy, and part of it lies in how well the well-reputed products and brands-like Michelin-are able to promote their products successfully at attractive prices. I´d say school´s out on that.
Is your C3M technology still in development, and is there a product or application for which you see this technology being used in the future?
We have a C3M facility right here in Greenville, and it´s not just in development-it´s active and it´s making tires today. We´ve been using it for short-run, high-value products, particularly at the upper end of the market.
The product is very good and the margins are very respectable. We´ll continue to use the C3M on that basis here in North America.
Are there any trends you´ve been following in 2006 that you see continuing into 2007, or any changes that you see taking place going forward?
In the earthmover market, we´ve got some excellent product there that the marketplace not only likes but needs because of worldwide capacity issues. There, it´s just getting it done and getting it out the door. In the ag market, we´ve come up with some new products, including the new XeoBib, a low-pressure tire that is really a beast.
We figure that will be a success when we roll it out in ´07.
In truck, we´ve got our Durable Technologies and continued growth for the X One, so that´s a continuation of that trend. You´ll see us ramp up our retreading production, and on the passenger and light truck side, we´ve got some new lines coming out in ´07.
We´ve also added some resources to our field staff, so that we´ll be able to be even more attentive to the independent dealer, and you´ll see us giving even more attention to our associate dealers, who are serviced by wholesalers-we´re going to increase our ability to reach them.
We´re also going to spend a significant amount of time in ´07 trying to get our people healthier, and hopefully it will be good for them, and also be good for both their pocketbook and ours.
If we do all that in ´07, we will have had a reasonably good year.
With all the cost increases you´ve faced in recent years, you´ve had to raise prices on your products. How have your customers responded to those increases, and have the price hikes affected loyalty? Have the price increases stuck?
No one likes a price increase, but at the same time, ultimately, anybody´s suppliers have to be able to make a reasonable amount of return. Otherwise, they´re going to go out of business.
I think we´ve seen a number of suppliers-not necessarily in the tire industry-to Detroit who have had their margins squeezed to the point where they´ve either had to declare Chapter 11 or actually had to quit the (original equipment) business. The newspaper´s full of them.
In that context, when you see natural rubber do what it´s done, and you see steel do what it´s done, and you see chemicals do what they´ve done, if you properly explain it and you give your customers adequate notice, hopefully they´ll understand that this isn´t a question of trying to be inappropriate, it´s a question of trying to make sure you earn a reasonable margin.
But it´s a communication process that needs to be done, and I think many of our customers have understood it.
There are a few who either didn´t understand it or couldn´t understand it because their own situation was such that they didn´t have a choice. By and large, I´d say people have understood the situation. Our price increases have stuck.