Groupe Michelin has announced plans to increase by 50% its production of economy tires at the firm’s Tigar Tyres subsidiary in Pirot, Serbia.
Currently, the tire manufacturing operation is set to produce 8 million tires in 2012, but capacity will be expanded to allow production of up to 12 million tires per year by the close of 2016.
The Tigar Tyres plant is located some 300 kilometers southeast of Belgrade. Overall, the project will represent an investment of 170 million euros for the period 2012-16. This reportedly equates to the creation of 700 jobs in Pirot.
In a statement on the matter, Michelin said the plant will continue to produce “exclusively entry-level tires” that are sold under the Tigar, Kormoran and Riken brands, all of which are in the Michelin portfolio. Work to expand the plant is expected to begin in early 2013 and the first tires should roll off the new production lines in the middle of 2015. Most of the tires produced will supply the fast-growing Russian and CIS markets, as well as markets in Central and Eastern Europe, Africa and the Middle East.
Morgan Stanley analysts, however, were not impressed, stating that Michelin is aiming to recoup part of the market it has lost in the last decade by pushing up tire production and sales volume across the board. Michelin, the analysts said, was “swimming in red ocean,” and that the Tigar expansion was “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 the 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 tires 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 marketshare to continue to increase in both their home and developed markets.
Morgan Stanley’s investor’s note (published April 3) 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.”
Morgan Stanley asks on behalf of its investors: If Michelin generates 60% of its pre-tax profits from just 25% of its sales from the combination of premium car tires and the specialty 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 tires? Their point is that it is a crowded and structurally low-value added segment.
News that Michelin is investing in entry-level or so-called tier three products follows a series of hints from senior executives that this was on the horizon. At the end of 2011 executive vice president of corporate development Laurent Noual, for example, told journalists and investors that the tiremaker would build up a presence in tier three: “In the coming four years an additional 150 kilotons of production capacity will be added to Michelin plants around the world; 70% of this will be in new markets, with greenfield projects accounting for most of this,” he explained. (Tyres & Accessories)
