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From All Sides: Consumers, Raw Materials Push Tiremakers to be ‘Aggressive’ in Cutting Costs

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As corporate executive and COO of a tire unit, Jean-Michel Guillon has a unique perspective of the entire tire industry. COO of Michelin Americas Small Tires (MAST) and executive vice president of Michelin North America (MNA), Guillon has to consider both the operational and sales/marketing sides of the tire business.

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Guillon started with Groupe Michelin in 1982, then moved to Brazil in 1986 as director of sales. He returned to France in 1988 as director of information systems marketing and sales, then moved to Sweden as vice president of marketing and sales in 1991. After a brief stint in Germany, Guillon joined MNA in 1997, first as VP of sales for MAST, then as COO of Michelin Automotive Industry Division (MAID). In July 2003, he was named COO of MAST.

In this exclusive interview with Tire Review, Guillon offers his perspective on raw material and manufacturing costs, offshore production and future tire technology.

Talk a little bit about raw material costs and how they affect tiremakers beyond just tire pricing.

“Over the last three years – 2003, 2004 and 2005 – we all know that raw material costs increased between 50% and 55%. In the past, we used to have a raw material and labor cost split of almost 50/50. Now, we have raw material costs taking well more than 60% of the cost to produce a tire. Cost is the key issue when you see this from the consumer perspective, but we see it from a combination of three major elements: One is increase in raw material pricing, the second is the increase of labor cost and the third is linked to the evolution and mix of tires on the vehicle. That has led to larger sizes on the same type of vehicle. All three of these elements play a role in the pricing of tires. When you consider the price of a tire for a Ford Explorer or a Honda Accord in 2005 in comparison to 2000, the effect is that the prices for the same tires are up 33% to 35%.

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“On top of this, and this is something that we have to deal with as an industry, is the supply and demand for raw materials and competitive buying of raw materials. We have to deal not only with a cost increase for raw materials, but also with a shortage of raw materials. When you are buying for Michelin or Goodyear or Bridgestone or any of the manufacturers, you know that you have to fight the price increases. But, you have to be careful how loud you yell because there is a limited supply, and you are in a difficult position.”

So, you are between a rock and a hard place. If you want to maintain a reliable supply, you can only complain so much.

“That is what you have to do. When you see Michelin’s results in North America, or broadly as a group, we have continued to be a very profitable company because we have been able to pass on these cost increases. We are the most profitable tiremaker in North America at this time because we have a specific position that helps us pass along these increases.

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“You cannot deny the fact that, even as raw material costs increase, tire sizes will have an impact. We can say that ‘business as usual’ is not the option anymore. From the tire manufacturer standpoint, to say that we will be able to recoup a price increase in the marketplace could be an error. At some point, you may have consumers saying they don’t want to play anymore because the tire price is too high relative to their wants. I think we are entering a phase in which each tiremaker must work very clearly on manufacturing costs and be aggressive in reducing those costs.”

Are some of the raw material shortages we hear of being artificially created to drive pricing up?

“No, that is not what I am saying. In the past few years, there has been a lot of pressure that we, as an industry, have built up. You have certain people saying that it makes sense to invest in developing these raw materials. In the recent past, we have seen some catastrophes that increase tire demand suddenly, and that puts pressure on raw materials. Plus, you have China and other countries in Asia trying to get more and more raw materials. They have not become any more self sufficient, so that additional demand is a factor.

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“I will not say that people are trying to gouge or doing such things. I think that you have clear events today that explain the cost imbalance we have in the marketplace.”

You mention the push back from consumers. Given the current state of North American tire manufacturing, what can tiremakers legitimately do to reduce their costs any more?

“From our perspective, this will be linked to the negotiations that we will enter with the union for some of our plants in July. We have to make sure that people understand that, today, we have a major difference in terms of labor costs, and we have to address this issue. This is one avenue to reduce costs.

“The second avenue, when you discuss raw materials, is considering if there are ways we can we reduce raw material use. We are working on this – trying to find other ways to produce the same tires with the same characteristics using raw materials that cost less.

“The third point is important: We must improve productivity. I will not give you numbers, but even with a plant as automated as our U.S. 1 plant here in Greenville (S.C.), we are discovering that, with a small amount of investment, we can improve the productivity in double-digit figures. Earlier this year, we announced a $26 million investment in U.S. 1 to do that.

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“When we speak of increases in productivity, we don’t mean just increasing or improving production. We are saying that we can also reduce the number of people necessary to produce the same number of tires. We have a major challenge ahead of us in the fact that a lot of people will retire in the next five to 10 years, and we see that as an opportunity to increase our productivity.

“Those are at least three avenues that we are pursuing very aggressively to help us continue to be in the game. If we want to continue to be number one, we will have to adapt and adapt quickly to this new environment.”

At what point do you run out of options? It makes sense that, at some point in time, you run out of things that you can conceivably change.

“From my perspective, you have to consider the different price tiers in the marketplace. When you are in Tier 3 or Tier 4, you don’t have as much room to maneuver in terms of pricing. For some manufacturers today, it is critical to them to put their manufacturing base outside of North America and do so as quickly as possible. When you are in the position of Michelin, you have a premium in terms of tire prices, and that premium can be used to make sure that you continue to invest in your current plants and that you gain productivity so that you keep that advantage.

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“In recent years, we have been challenged by the market and have made significant progress by being creative. When you are in a more difficult environment, you become more creative and have a sense of urgency. In terms of manufacturing costs, I can tell you that we are not saying that we should close another North American plant to solve our cost problems because we have no other way to deal with this. We have other ways, and I see a very high level of potential in reducing our costs.”

Right now, Michelin has a number of plants in North America with a distinct labor cost advantage over its major competitors. Still, is there is a point at which you start looking at more offshore production?

“I think, right now, that 85% of our sales are tires produced in North America. In comparison to some of our major competitors, we are selling a higher percentage of local production. Now, we are closing a plant in Canada that was focused more on the low-end segment. In this type of environment, when you bring value to the consumer by focusing on premium products, I don’t see any issue. I can tell you that we have no plans to move production out of North America.”

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From a broad perspective, how do you see tire manufacturing in the U.S. in the next five years? Will there be more offshoring or maybe some of the smaller players bringing production here?

“In certain segments of the market, you will see some movement in the industry. We all have to recognize that the pressure we receive from some Asian manufacturers will have an impact on the manufacturing base in North America. If we can continue to bring added value with a premium product – whether we are talking about tires or some other type of product – we will continue to keep the same industrial base.

“In the tire industry, I think we will see new commerce from Asia building some plants here. Their strategy is that they want to be at OE, so they will have to build an industrial base here.

“For the industry overall, it is clear we will have a reduction of the manufacturing base here if we do not make the right decisions in terms of costs. When people say this is the end of tire manufacturing in North America, I think you have to be very cautious because we like to think that we have some advantage producing value tires in North America, and we have to build on this.”

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From a technology standpoint, where do tires go at this point? We have run-flats, though that market segment has been slow. Where do you foresee the market and technology going?

The issue with run-flats is: What is the type of solution we will have in the future? I think the jury is still out. There are different solutions today. We are pushing some of them because we think that they are the best options. At the end of the day, it will be decided based on whether you are able to bring solutions that make sense for the consumer at a price that makes sense for the consumer. I will not take a bet on that part.

“What you have seen in Michelin’s approach is that we are pursuing different solutions all at the same time. The market will be more mature for the solution that makes the most sense at the consumer level. Some companies have made major efforts on self-supporting tires. But, if you promote one particular technology with the OEMs that does not bring value to the consumer because of stiffness or because of wear or whatever, that technology will fail. You are not helping the industry value the product in the way that you want. We are in the middle of this.

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“We are not building a lot of marketing plans on Tweel. When you are a company like Michelin, you need to have people, sometimes people not directly involved in the business, thinking two or three steps forward. This is the way Tweel and other innovations by Michelin are developed. At some time, we will have to build the business case and see if it makes sense or not. I think the Tweel concept is an interesting one, but does it make sense for the entire industry? We are not in a phase where we can clearly answer that.

“Another technology area we are exploring is electronics in truck tires. We have not done so in passenger and light truck tires. Electronics in tires is clearly a path that is very promising on the truck tire side of our house, but we are not to a point on the passenger car side where we can say that the path we are taking will make a difference in the short term. We are still studying it.

“The third area is raw materials technology. We know that, in the future, we will face more constraint with present raw materials, so we need to look at other options. If we can use new raw materials to improve certain key performance features – like wear or traction – our difference with competitors will increase. And, in terms of pricing, our margins will also improve. In my mind, this is technology that is not very apparent or very exciting, but it is very important.”

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With the situation the industry finds itself in with TPMS, can tiremakers eliminate the in-wheel mechanicals in favor of an embedded or attached chip solution vs. a valve-stem or drop-center sensor?

“We are looking at everything. But to do this, we as an industry must agree on one frequency and one standard. We have taken the leadership to standardize the industry on what is called the B-11 standard so that everyone is working on the same platform.

“With our embedded RFID transponder, we have shared it with others in the hopes of bringing standardization to the industry, and we have seen progress there. All of the major international groups have B-11 as the standard, and we have seen competitors recently launch products using B-11 standards.”

Car dealers selling tires has become a big issue for tire dealers. What is Michelin’s position with regard to dealing with car dealers as points of purchase for consumers vs. the traditional dealer channel?

“The approach of Michelin has always been that we have a very technical product, and we have to find channels of distribution that will help us – and it must be a win-win situation for both partners – develop our tires and the value of our tires to the consumer. You have customers that buy in specific channels. Some will be more comfortable buying from a tire dealer because this is a person that they know and trust. Some people will go to mass merchandisers. Certain people will go to a car dealer to take care of their car.

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“I do see some people very worried in the tire dealer channel saying that car dealers represent 2% to 3% today and will represent 6% to 7% in five years. They feel that is a threat to them. My message to tire dealers is not to focus on one channel that seems to represent a threat for you, but see the dynamics of this market. At the same time that car dealers have more opportunity to sell tires, there are other channels that are under tremendous pressure. Their markets are so complex that they cannot take this pressure and be able to sell tires in the future. We have seen a lot of mass merchandisers lose share in the past few years.

“If each channel understands the value it brings to the consumer and builds on that value, there will be a lot of room for a very strong tire dealer channel and room for car dealers to sell tires. I think this is how we have to see the evolution of the market.

“Dealers should not be on the defensive and feel that they need Michelin or Bridgestone to protect them from the car dealer channel. They should say they need a Michelin or Bridgestone or another tire manufacturer to help them increase the value that they bring to the consumer and improve their bottom lines. If we have this type of approach, together, we will be more constructive and more progressive in the future.”

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