Enhancing a Global Position
The last year has been eventful for Cooper Tire & Rubber. First the company sold its Cooper Standard business, then it bought an 11 per cent stake in Korean manufacturer Kumho Tire, now the company’s management is optimistic that it is “in the middle of a transformation.” Tire Review’s Jim Smith met Cooper president and CEO, Tom Dattilo, and found out his thoughts on the diverse diverse subjects of emerging markets, run-flat technology and how Cooper can enhance its position as a global player.
You were quoted as saying Cooper wants to get a 15 per cent market share in China. What specifically is your plan to reach that goal, and will that strategy involve OE contracts with China-based (not necessarily Chinese) manufacturers?
Dattilo: It’s possible I was quoted as saying 15 per cent, but what I say all the time is that we want to be number one in that market there. We figure approximately 15 per cent will get us that position, and we’re going to do that in a combination of ways.
The first way is to make acquisitions. We will make acquisitions and introduce our brands probably at about the same time 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.
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. 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.
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’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.
Is OE part of the equation there?
Dattilo: It might be. It pains me to say anything about OE tyres. 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 the mindset that “if it is on an OE vehicle as OE, that is a good thing.” 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 tyres in China – they’re going to want you to do it elsewhere. We don’t want to give them too much of our capacity, so we’ll probably start with a Chinese manufacturer before we do a global OE. Chinese automakers are growing. There are four or five Chinese automakers that have real legs to them.
The Cooper-Standard operation that you recently sold gave Cooper some experience that it previously hadn’t really had in the OE business. Now that you’ve sold that business, is there a possibility of Cooper getting into the OE tyre business in Europe or North America?
Dattilo: Again, no, but a slightly qualified ‘no.’ We certainly don’t want to be a major OE participant, 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 tyres.
I can understand that approach if you are new to the market and trying to get some recognition, if you’re a Hankook, for example. I can understand why Hankook would want to come into North America and get an OE position with Ford. But that’s not our position in North America. If you take all of our Cooper-produced products, we have approaching 20 per cent of the market, so we’re not trying to get any toehold anywhere.
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 – we might do that.
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: It is really, other than understanding them as well as we do helps us understand the market. The CEO of Hangzhou Zhongce is a good businessman, a knowledgeable tyre guy and understands how tyres 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.
In terms of how it’s doing in the US, it’s the same China story: three steps forward, and two steps back. We are behind in both our medium truck and passenger tyre programmes with them. Now, we’ve got the passenger tyre, the broadline, entry-level economy tyre, starting to come in the kind of quantity that will be helpful. We are still behind in our medium truck.
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 tyres have to be built using our moulds. It is not like we’re moving moulds 20 feet and running tyres. They are 6,000 miles away, and that makes it a more complicated process.
We are picking up the pace with the passenger tyres. In medium truck tyres, we are significantly behind. We are still making them in Albany, Georgia, and we still plan to phase out our Albany production over the next six to seven months. 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 tyres.
Is Hangzhou Zhongce gaining a certain amount of technical expertise because of this relationship?
Let’s talk about another part of Asia. What is Cooper looking to do by owning an 11 per cent 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.
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. 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.
How far do you envision that relationship going? Will it go beyond 11 per cent?
Dattilo: Off-take, by the way. I didn’t mention off-take. That’s another possibility. We’ll make tyres for them, they’ll build some for us. I think at this point, it is what it is.
What was the final amount Cooper spent to gain that 11per cent 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 will the products produced be specifically for China, or are you going to use that to fill capacity needs here?
Dattilo: Did I mention that working in China is three steps forward, two steps back? 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.
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. One thinks 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’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.
Once the plant is running, we will get 100 per cent of the output, and we’ll focus that on export, immediately. And then in year six, Kenda will start taking a 10 per cent share of the output until in year 10, it will be 50/50. All of the tyres 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. But, today, they are all intended to be exported.