When it comes to making cost savings in Europe, Groupe Michelin’s management is apparently not ruling anything out.
In a clear sign of the pressure tire manufacturers are under in Europe, Michelin is said to be considering headcounts and manufacturing capacities. The fact that such things are being discussed so openly could also be interpreted as a sign that the company is trying to allay investor questions related to what action it is taking to address the tough conditions the market has found itself in.
And the moves extend beyond plant operations and capacities to sales offices. Word came yesterday at Michelin has shuttered its sales offices in Greece, combining that unit at a new administrative center in Bucharest, Hungary, as of January 2014.
Quoted in the March 25 edition of French daily Les Echos, Florent Menegaux, director of the passenger car and light truck products division, said: "We do not exclude anything, we must consider the evolution of the market, whether the situation is sustainable or not.”
“We are in a situation of overcapacity. All segments are impacted."
Various news sources point out that Michelin, which employs 63,000 across Europe and is the world’s second largest tiremaker, met with union representatives on March 7 to discuss the future of some of its French plants.
Any move in this direction would appear to counter earlier strategies to reduce headcount in the mature European markets through the natural cycle of attrition.
"We must think about the market’s evolution, assess whether the situation will last,” Menegaux told Les Echos, with the company pointing out that passenger car and light truck tires fell 13% in February after declining 14% in January.
The questions are will Michelin have to follow through on plans of this kind and if so what will be cut first? Of course with the tail-end of the closure of Goodyear’s Amiens, France, plant still underway, there is precedent for such action amongst the companies peers. However, Michelin has always appeared reluctant to cut jobs in its homeland through direct redundancies and plant closures wherever other options remain open.
That the company is being so open about the scenarios it is considering highlights the seriousness of the situation and suggests the company is preparing for the possibility of taking action in this way.
As far as the question of what direction the cuts will be focused on is concerned, financial analysts at Deutsche Bank are suggesting that the situation is particularly acute in the case in truck tires.
In an investors note dated March 26, Deutsche Bank points out that since 2007 (after which the financial crisis began) the European truck tire market has declined by 8% (from around 22 million units to 20 million units). At the same time, Michelin has reportedly lost marketshare from 36% in 2007 (which is made up of a 70% share in OE and 22% share in replacement tire sales) to an overall figure of 29%, according to Deutsche Bank.
This is said to be partly attributable to a voluntary reduction of the company’s OE marketshare. However the result is that seven of the company’s plants in Western Europe are said to be currently running at a low 60% of capacity. And this specifically means production of 5.5 million units compared with a capacity of 9.9 million units. Furthermore the analysts estimate that overcapacity can be estimated at 2.5 million units (or two plants) and 2,500 people.
Nevertheless Deutsche Bank’s thesis is that nowadays tire companies are more profitable in passenger car tires than in truck tires because truck tire operations have suffered from “limited restructuring, weak volumes, higher raw material content (especially natural rubber)” and in addition despite higher selling prices Michelin generates lower margins in trucks (7% EBIT margin in 2012) than its European peer group.
However, whether this is an accurate picture and what this would mean in practice if it is remains to be seen. (Tyres & Accessories)
