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Out of the Ordinary: Cooper’s Top Exec Discusses Recent Transformation, Global Ambitions

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To get a sense of Cooper Tire & Rubber Co. and its chairman, president and CEO, you need look no further than Tom Dattilo’s corner office. Unlike the vistas other captains of industry enjoy from their lofty perches, Dattilo’s third-floor office overlooks Oler’s Drive Thru, a convenience store that stands as a stark reminder of who the real boss is – the retail customer.

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The office itself is rather plainspoken, like the man and the company. Well organized and appointed with a handful of mementos and heavyweight business reading, it is nonetheless rather unremarkable. Quite unlike the course Dattilo has steered the Cooper ship over the past 12 months.

In that time, Cooper halved itself, shedding its Cooper-Standard Automotive business to focus solely on tires. Broadline tire production was moved offshore, as was medium truck tire production, to free up space for higher margin high performance and light truck/SUV tiremaking. Plans were formulated to attack the burgeoning market in China. And, most recently, Cooper took an ownership stake in another tire manufacturer – South Korea’s Kumho Tire Co.

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In this exclusive interview, Dattilo talks about these moves, and what they will ultimately mean to Cooper tire and its growing contingent of global customers.

Cooper has a lot of interest in China. You were quoted as saying Cooper wants to get a 15% marketshare in China. What specifically is your plan to reach that goal, and will that strategy involve OE contracts with China-based, not necessarily Chinese, automakers?

Dattilo: It’s possible I was quoted as saying 15%, but what I say all the time is that we want to be number one in that market there. We figure approximately 15% will get us that position. But really, we want to be number one in the market, and we’re going to do that in a combination of ways.

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The first way is to make acquisitions. We will make acquisitions and introduce our brands probably at about the same time in China. It takes a long time to get anything done in China. It’s a country of three steps forward, two steps back. We have to make sure we get the right partners, that we understand the country, that we understand the culture and that we understand the opportunity before we spend a significant amount of money. And, actually, that depends on what your definition of ‘significant’ is. It’s pretty hard to spend a whole lot of money there. Even the biggest independent companies in China today, their value is around $200 million or $250 million. That’s not insignificant, of course, but you’re not giving away the farm completely, either.

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We have established relationships there, and we have to make sure that their thought process is the same as ours and that their manufacturing capabilities are consistent with our global approach, and that we have a trusting relationship. We want acquisitions that will allow us to make product locally that we can brand ‘Cooper.’ It is the Cooper brand there in conjunction with, or in combination with, these other companies, that is important.

So, it’s a combination of acquisitions and introducing the Cooper brand. The Cooper brand has to be made locally. We’re not going to ship Cooper brand, certainly not in any quantities anyway, from North America to China. That makes no sense. So, we have to have that product produced in China for us to introduce the brand in China. We are going full steam ahead to get ready to introduce the Cooper brand. We’ve been over there interviewing advertising agencies, doing market studies and really understanding the market. When we are ready to introduce the Cooper brand, we’re going to do it in a big way.

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Is OE part of the equation there?

Dattilo: It might. It pains me to say anything about OE tires. I think we all have a sense that the Chinese consumer is not as sophisticated as the North American consumer or the European consumer. There is a prevailing sense that it is going to take a long time to change that mindset that ‘If it is on OE vehicle as OE, that is a good thing.’

That is probably something we will explore with the Cooper brand. Whether it’s with a global maker or local Chinese automakers will still need to be determined. It’s pretty hard to supply Ford or GM just tires in China; they’re going to want you to do it elsewhere. We have to be careful about that. We don’t want to give them too much of our capacity, and we don’t want to have a relationship that is too broad. So, we’ll probably start with a Chinese manufacturer before we do a global OE.

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Chinese automakers are growing. There are four or five Chinese automakers that have real legs to them.

The Cooper-Standard operation that was recently sold gave Cooper some experience that it previously hadn’t really had in the OE business, at least from one part of the equation. Now that you’ve sold that business, is there thought of the possibility of Cooper getting into the OE tire business either in Europe or North America?

Dattilo: Again, no, but a slightly qualified ‘no.’ We certainly don’t want to be a major OE participant, that’s for sure, in Western Europe, Europe or North America. Or China, for that matter. Some of our competitors have a strategy of penetrating the OE business and then using that to pull through replacement tires. For us, that just doesn’t work. We just don’t think it makes sense for us. We don’t think the brand equity we develop doing that is worth the pain and suffering of being an OE supplier, certainly not financially.

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I can understand that approach if you are new to the market and trying to get some recognition. But that’s not our position in North America. If you take all of our Cooper-produced products, we have approaching 20% of the market, so we’re not trying to get any toehold anywhere. It would only help here if we thought that would give us some extra brand equity upon which to build. It might help a little bit, but in our minds that’s not sufficient for the pain and suffering.

Now, having said all that, if we could find a good relationship with one automaker here and we could develop a product specifically for them for one small application that had some visibility – not so much visibility that they take too much of our capacity – we might do that. I could see us doing something like that. But I don’t think of us as wanting to be an OE supplier the way some of our competition does.

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In Western Europe, the Avon and Cooper brands are good, solid niche brands, and I don’t think they need an OE presence to develop that strategy. Although, if we could put Cooper brand on a Porsche 911, that might not be a bad idea. There’s not much volume but high visibility and technology.

How do your existing off-take deals with Hangzhou Zhongce Rubber Co. play into Cooper’s growth strategy for the China market? How has that agreement served Cooper’s broadline and medium truck efforts in North America?

Dattilo: The first part of the question – how is the off-take relationship with Hangzhou Zhongce Rubber helping us in the China market today – it really isn’t, other than the fact that being with them, visiting them and understanding them as well as we do helps us understand the market. The CEO of Hangzhou Zhongce is a good businessman, a knowledgeable tire guy and understands how tires are made and sold in Asia very well. From that standpoint, it’s helpful. But the off-take agreement we have today is only for export. They aren’t producing any products that we’re selling in China. Not that they couldn’t, but, today, there is none of that at all.

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In terms of how it’s doing in the U.S., it’s the same China story: three steps forward, and two steps back. We are behind in both our medium truck and passenger tire programs with them. When we first put these relationships together, in late 2003, we thought, by this point, we would have more tires than we do. It just hasn’t happened as quickly. Now, we’ve got the passenger tire – the broadline, entry-level economy tire – starting to come in the kind of quantity that will be helpful. We are still behind in our medium truck.

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With that type of arrangement, when we are putting the Cooper name on it, we want to be very, very careful that it meets the standards we are looking for. In terms of technology, quality issues, it’s complicated. The tires have to be built, and they are using our molds. It is not like we’re moving molds 20 feet and running tires. They are 6,000 miles away, and that makes it a more complicated process.

They haven’t produced tires for us before. We are a systems-based society in North America. There’s some good and bad in that. The good is that it has certainly helped the quality of all North American products. The bad is that if somebody off-shore is doing something for you, you have to fit within those processes.

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We are picking up the pace with the passenger tires. In medium truck tires, we are significantly behind. We are still making them in Albany, Ga., and we still plan to phase out our Albany production over the next six to seven months, and by the end of this year we are going to rely, essentially, exclusively, on Hangzhou Zhongce for medium truck radials. If we see that we still have some hiccups, we’ll phase that process down a little bit. It is hurting us today in the marketplace because we don’t have a sufficient quantity of medium truck tires.

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Is Hangzhou Zhongce gaining a certain amount of technical expertise because of this relationship?

Dattilo: Certainly.

Is that relationship going to expand to the point where you will take an active ownership stake in their operations?

Dattilo: We have a relationship. Whether it develops into anything more than that is hard to tell. We don’t have any current plans to do anything right now. They are owned by a combination of the local government and Hong Kong investors and some other people, and the company, really, is not for sale. That doesn’t mean it isn’t in our best interests to help them make our product faster, better, easier and less expensively with less scrap – for no other reason than to increase the capacity they have available. Even if that means they can supply somebody else. Really, it’s not that big of a deal. The technology keeps changing faster and faster.

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There is a mandate there relative to passenger tires to convert over exclusively to radials. It may take a little longer to reach the point of mandating the same in medium truck tires.

Dattilo: Because they have so much off-road stuff there. Even some of their on-road stuff is off-road. In a lot of cases, they are trying to preserve employment, too. There is a wealth of small operations that make a handful of sizes. They have a bunch of tire factories that produce exclusively bias tires, and they have a couple of successful, state-owned enterprises. The government is essentially forcing these successful, state-owned enterprises to gobble up these bias tire plants and try to make something out of them – run them better, find a partner, do something. That’s not going to be easy. No non-Chinese company is going to want to invest in a bunch of bias tire plants that have a very short life. But that’s what they are trying to do there. They are trying to get some of these state-owned enterprises to consolidate the bias plants and do something with them.

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Let’s talk about another part of Asia. What is Cooper looking to do by owning an 11% stake in Kumho Tire Co.?

Dattilo: We both publicly said that there are possible synergies in three to five different areas. There are possible synergies in purchasing, in technology sharing, in China, in commercial operations in Europe. That’s what we’re in the process of doing. Our 11% stake just became official this week. They just went public in mid-February, so obviously, it’s in the very early stages.

We’ve already had our people meeting with Kumho, and we’ve got more meetings coming up to try to find the synergies that we think will make sense. That’s what we’re doing. They believe, as we do, that global relationships and alliances are important in a world that is ever shrinking. And we have a lot of complementary things going for us. We are strong where they are a little weaker, and they have some strengths where we are a little weaker. So, we can help each other. Another thing, for us, is we are invested in them, so, as the value of their stock price goes up, the value of our investment goes up. We like that.

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How far do you envision that relationship going? Will it go beyond 11%? Is it going to go beyond technical sharing? Is it going to be more a partnership on a global basis?

Dattilo: Off-take, by the way. I didn’t mention off-take. That’s another possibility. We’ll make tires for them, they’ll build some for us. I think at this point, it’s what it is. We’re going to see if we can do some things in those four or five areas that I mentioned that could improve both of our positions and operations and make each of us more money.

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What was the final amount Cooper spent to gain that 11% stake in Kumho?

Dattilo: It was about $107 million.

How have things progressed with the joint venture plant with Kenda in China? Is it going to be up and running in 2006, as you planned, and is product coming out of it going to be specifically for China, or are you going to use that to fill capacity needs here?

Dattilo: We anticipated breaking ground in the first quarter of this year. That’s probably not going to happen. It’s probably going to be in the second quarter. We’re still discussing with the government there exactly which final approvals we need to have before we can break ground. It’s way too complicated a story to tell.

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The Chinese government, which controls all of these things, is still studying exactly how capitalism would work, and how you discuss things across the table and how you don’t. They have not gotten over the surprise approach. You think that you have everything in order and then, to a Westerner anyway, out of the blue there’s one more requirement that has to be met. If you’re dealing with the local government, it’s an everyday occurrence.

We are hopeful that we are just a few weeks away from our final approval. We were there three weeks ago and sat around a table, right before the Chinese New Year. That’s what our thinking was then, and it hasn’t changed. We’re probably going to be a month behind from when we wanted to break ground, but we should be able to make that up in construction.

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Once the plant is running, we will get 100% of the output, and we’ll focus that on export, immediately. And then in year six, Kenda will start taking a 10% share of the output until in year 10, it will be 50/50. All of the tires are expected to be exported. We have an export license, we are not going to use them for the local market. That can be changed down the road. One can always change from an export license. But, today, they are all intended to be exported.

Are things more complicated, do you feel, because Kenda is a Taiwanese company? Does that complicate things more, or is that not really an issue?

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Dattilo: No, because Kenda, first of all, has a plant right there, in the city of Kunshan, which is where this joint venture plant is going to be built. They’ve had that plant there for a very long time. They know the people pretty well, and they are a major employer there. We have Chinese advisors, lawyers and environmental people and everything else that goes into it. No, I don’t think that’s a problem.

How has the marketing and distribution of the Kenda passenger and light truck tires in U.S. progressed, and what has been the reaction from your dealer base?

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Dattilo: Pretty good. It’s the Kenda brand that we sell through the Cooper network, and the Lexington brand is sold through our Mastercraft network. And it’s pretty good. Almost everybody now is used to buying a product that is not built in the U.S. to start with.

What is Cooper’s European strategy and how do the Avon and Cooper brands fit into that strategy?

Dattilo: The Avon brand has been a solid niche brand in Europe for a good long time. And it is certainly a strong, well-known brand in the U.K. It’s going to continue to be a niche brand. It’s got a good ultra-high performance image, which gets better and better all the time. And we will continue our racing tradition to further that tradition.

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The Cooper brand is a niche brand in Europe also. Mastercraft is a niche brand there also, but not a top brand the way Avon and Cooper are. We have introducing Mastercraft into Europe in recent times.

One thing to remember about Europe is that, even though it is Europe, each of the different countries market a little differently. We have subsidiaries set up in France, Germany, Italy, Switzerland and a factory in the U.K. We market to whatever fits the environment in that country. It’s not one size fits all, and you’ve covered Europe. You have to treat them individually, so it’s more complicated.

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We certainly think the A1 Grand Prix is going to do a nice job for the Cooper brand in Europe. We are confident that that series is going to be very popular in Europe.

Looking at Europe, and going back to your relationship with Kumho, is Cooper considering buying or building a plant in Europe, beyond what you currently have?

Dattilo: Certainly not today. That doesn’t mean we won’t do that down the road at some point, either individually or collectively, in Eastern Europe. We would not do it in the high-cost countries, like the U.K., Germany, Spain, France, etc. It would have to be in Eastern Europe. But we have no current plans.

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Many companies are consolidating operations and shipping their production to Eastern Europe. What are Cooper’s plans, specifically, for the U.K. plant?

Dattilo: We have changed that plant pretty dramatically over the past five years. We have essentially taken all of the economy products out of that plant. It’s pretty much exclusively a high performance and ultra-high performance plant. And, by doing that, it can be competitive. And it is. It has a very good workforce making very good products. It is a model of lean manufacturing techniques, and we are happy with the performance of that plant. And it will just keep getting better.

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Long term, it fits into your strategy?

Dattilo: We have no plans to do anything other than what I just said. The definition of broadline in Europe, over time, is going to encompass higher and higher speed ratings. As speed-rated tires become more commodity-like, we’ll keep taking them out of production there and start making them somewhere else or outsourcing them, or who knows, eventually in a central or European plant. We see the high-end tires being done there for many years.

Your 2004 financial results were pretty positive on an overall basis. But they seem to be met with some skepticism in the market. The stock dropped off the last couple days, maybe about $4 a share. There has been some suggestion that perhaps the share price itself has been overvalued for some time. What do you plan to do to win back the confidence of the investors and try to grow some value back?

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Dattilo: We’ve traded over four million shares within the last couple days (the interview was conducted on Feb. 18). We’re in the middle of a transformation here, of course, and we’ve talked to the market about that. And we’ve talked publicly about that. We have plans to buy back stock and buy back debt and essentially re-capitalize the company and move forward from there.

I’ve never been a person who believes the market is rational on a short-term basis, not day-to-day, week-to-week, or even month-to-month. It’s only rational in the long term. So, I don’t concern myself too much with what’s happening to our stock price on any particular day. Our purpose is to create value for the long-term shareholder and to increase the value of that investment. And, I think, as we start to execute the debt and stock-repurchase strategy, which is happening, essentially, now, people will be buying our stock. If we trade four million shares in two days, by definition, somebody is buying it.

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One analyst said that Cooper’s fill rates have been in the 80%-90% range, and he considered that a positive. You alluded to some of the issues you were having on broadline and medium truck, in particular. Is that a good sign?

Dattilo: We’ve got the orders, but we just can’t fill them.

You’re having a harder time getting product through the pipeline. Manufacturing capacity in North America has got to be a concern. With the plants that you have, you’re converting over to make high-margin performance products, and moving broadline tires offshore. Are Cooper dealers going to start to see more reliable supply? And are you looking to for other opportunities to add capacity in North America?

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Dattilo: For a few years now, the North American market has been undergoing an amazing shift away from a broadline tire in several sizes to a high performance or ultra-high performance tire with multiple sizes and SKUs. It is amazing how much this marketplace has shifted and continues shifting. It’s what happened in Europe years ago, and it’s going to happen more. The sizes that are on vehicles in 2005 and will be in 2006, 2007 and 2008 are getting bigger and wider with shorter sidewalls.

Because we were so identified with the broadline product for so many years, we have had to change pretty significantly to get ourselves ready to make a modern portfolio of products. We had to design and develop a lot of high performance and ultra-high performance products, which we’ve done to very high acclaim. And we keep adding SKUs. We added 1,226 SKUs in 2004. That’s almost a 20% transformation.

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At the same time, we have had to add new equipment to make the new products more effectively and more efficiently, with more uniformity. The product itself has more components to it, and takes longer to cure. So, you reduce your capacity anywhere from 20% to 30% as you bring in these new tires. The more light truck tires you make, the more you reduce your capacity. So, we’ve had transformation in the marketplace, an incredible proliferation of sizes, and we’ve had reduced capacity because of these new products.

All of those things combined are going to make it very difficult to supply the customer and make the product that everybody wants and needs. That has hurt us, because we are the number one supplier year after year in customer satisfaction. So, while many companies would think order fill in that range is pretty darn good, to us, it’s terrible and we are not happy about it. We can see that our order fill is up every week from where it was the week before over the last several months. Our customers are getting closer to what they’ve historically got from us. But we are not at 95%, and until we get to 95%, we won’t be happy.

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Are you looking at ways to expand your capacity in North America?

Dattilo: We expanded that capacity last year. We’re adding presses as we speak. We’ve got new presses coming in. Some of it is added capacity; other is substituted capacity. The old equipment that made the broadline beautifully is not conducive to making 35 aspect ratio tires with 24-inch rims. It just doesn’t work. We’ve also had to add people over the last 18 months, so we had a training/learning curve. It’s really a moving target all the time. We can’t afford to transform our plants so dramatically that everything is in chaos, and yet we can’t afford to keep the status quo because we won’t be able to make the product. It is a very interesting challenge to our manufacturing people.

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Even after buying back stock, reducing debt, pension funding and buying a share in Kumho, Cooper will still have money left over from the sale of Cooper-Standard? How will those funds be reinvested in the company?

Dattilo: We don’t have any specific investments to discuss today. Of course, we said we want to make acquisitions, and we are going to try to. We did make that investment in Kumho within days of the divestiture of Cooper-Standard. We have a tendency to act on things. If we say we’re going to do some things, we do them.

Obviously, you’ve done a lot to boost your high performance presence, but Cooper does not as yet have a run-flat product. Can we expect to see a run-flat from Cooper soon?

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Dattilo: That depends on what your definition of ‘soon’ is. We’re not in the OE business, so we don’t need one from an OE standpoint. The market for run-flats in the replacement market is still very small. It’s not something we feel compelled to do within the next couple of years. We’ll certainly have one when the replacement market calls for it. And that’s not for a few years.

If your question is whether or not we are in the process of developing one, the answer is ‘yes.’ We have run-flat technology we’ve been working on for a few years. There are also different ways to skin that run-flat cat. There are other approaches that I don’t want to get into, quite honestly, that could have an impact here. I don’t mean an airless tire or polyurethane tire or anything like that.

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Do you think that in China car dealers will gain a stronger advantage in the replacement tire market vs. independents? Even to the point of there not being independent tire dealers there at all?

Dattilo: That’s an interesting question. My gut reaction is “no.” It’s only a gut reaction because the way tires are sold and distributed there is still up for grabs. It’s to be developed and determined. And whoever best defines that is going to have a real strategic advantage.

I believe it’s going to be defined by the tire companies because they are the ones who want to sell tires. The car dealers are not even thinking in those terms. I think a lot of tire companies are going to have their own distribution. Bridgestone has already announced that they are going to have hundreds of stores. Goodyear and Michelin both have some owned and franchised concepts that are exclusively for their own brands. And there are other companies that own retail stores that we’ve seen. And there are a bunch of hole-in-the-wall shops.

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I don’t know exactly how it will develop, but my guess is that it’s going to be developed by and through the tire companies and independents, a lot like in North America. If you think about why that might happen, North American businesses are much more independent than the Europeans. North America has a history of capitalism, whereas Europe doesn’t. We are very comfortable with small businesses, and going out and being entrepreneurs. Europeans aren’t that way. They are more centralized, more bureaucratic. The entrepreneurial spirit doesn’t jump out at you there. So they aren’t independent of anything and everything.

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China, other than this last 50 years of communism, has a 2,000-year history of entrepreneurship and capitalism. And, they have always understood and believed in small, independent businesses. They got stifled for a period of time. I think that there will be a lot of independents there. That’s just a hunch, nothing else.

What are your thoughts on the emerging markets in Russia and India?

Dattilo: I think they are more emerged than they were five years ago, and they will be more emerged five years from today. I think that India, eventually, will be kind of like China. Reports from people I trust say that the infrastructure there is not nearly as developed as China has developed in the last five years, so they are certainly behind in that regard. But they’ve got a billion people, and they’ve got capitalism. There have always been a lot of people there who want to succeed. I think that India, over time, will be a great market.

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Russia, I’m still a little concerned about. That might not be a bad place in the next 10 years to open up a low-cost plant, somewhere in Eastern Europe, which is basically Russia.

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