Is Michelin considering European plant closures?
When it comes to making cost savings in Europe, Michelin’s management is not ruling anything out. In a clear sign of the pressure tyre 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.
Quoted in the Monday 25 March 2013 edition of French daily Les Echos, Florent Menegaux, director of the passenger car and light truck products division reportedly said: “We do not exclude anything, we must consider the evolution of the market, whether the situation is sustainable or not,” adding: “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 tyre maker, met with union representatives on 7 March 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 tyres fell 13 per cent in February after declining 14 per cent in January.
Are truck tyres a particular concern?
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, as a French company 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 tyres.
Lower market share means reduced factory utilisation
In an investors note dated 26 March, Deutsche Bank points out that since 2007 (after which the financial crisis began) the European truck tyre market has declined by 8 per cent (from around 22 million units to 20 million units). At the same time, Michelin has reportedly lost market share from 36 per cent in 2007 (which is made up of a 70 per cent share in OE and 22 per cent share in replacement tyre sales) to an overall figure of 29 per cent, according to Deutsche Bank.
This is said to be partly attributable to a voluntary reduction of the company’s OE market share. However the result is that 7 of the company’s plants in Western Europe are said to be running at a low 60 per cent 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 tyre companies are more profitable in passenger car tyres than in truck tyres because truck tyre 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 per cent 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 (will Michelin consider closing two whole plants or spread cuts across the continent? Is there another option?) remains to be seen.