Analysts: Goodyear break-up is bad news for Sumitomo

While the news that Goodyear is looking to exit its international joint venture with Sumitomo Rubber partly precipitated a 10 per cent intra-day leap in Goodyear’s share price, commentary on the latest financials published by Sumitomo suggest that the JV break-up the two companies are currently in arbitration over could be bad news for the Japanese tyre maker.

It is still early days when it comes to predicting the outcome and even the strategy of the aforementioned JV dissolution, but at times like these discussions can be informed by those that are forced to put their money behind their assertions. With this in mind the theses being proposed by financial analysts offer interesting food for thought. In an investor’s note published 13 February, Morgan Stanley analysts said the move “surprised”.

Their reading of events was that the sales and manufacturing joint ventures in Europe and North America and sales joint venture in Japan will be cancelled; off-take deals producing Dunlop brand products for the European/US joint ventures will be reduced; the two firms’ raw materials joint purchasing deal will be cancelled; and they will be any joint shareholding. Nothing new there.

What the Morgan Stanley analysts were clearer about is that they had “negative first impressions of [the] break off”, negative that is for Sumitomo. While details obviously need to be confirmed, the dissolution is expected to result in a drop in off-take sales of the Dunlop brand to Europe and North America. According to the analysts, this represents about 5 per cent of the firm’s global sales. However, it is unclear when the impact will be felt as this depends on how the arbitration process goes and other factors such as Goodyear’s capacity standing.

As far as joint purchasing is concerned, some impact is expected, but the competitive nature of the market – and specifically the drive on all sides to develop more advanced and more fuel efficient tread compounds – means Sumitomo has been developing and purchasing more rubber ingredients independently. The same is likely to be true for Goodyear and therefore the financial impact on both parties is likely to be limited.

As far as branding is concerned the end of the cooperation in terms of Dunlop production means the firm needs to strengthen its Falken brand globally. There could even be independent production in mature markets, according to Morgan Stanley: “In addition, we think there needs to be a discussion about whether the firm should have its own factories in Europe and North America in future”

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