Michelin financial analysis| Michelin Company Profile Michelin is a tire producing company created in 1863 by the Michelin brothers. Originally based in Clermont Ferrand, the company is now located in more than 170 countries and owns 84 production site all around the world. Even if their core business is the production of tires they diversified their activities in 1900 with the first Michelin map & guides and extend their knowledge for special sector with new type of tires such as plane tire for instance. Michelin is the second leader of tire market after Bridgestone.
In 2010, they had a turnover of 17 891 millions € with an increase of 20% from 2009. Michelin is on the stock exchange market since 1951 which means the company can increase their equity thanks to investors and at the same time stay secure and independent. In 2010, Michelin launches its biggest increase of equity introducing 27. 2 million of new shares for a total amount of 1. 2 billion euros helping to finance its development cost estimated at 1. 6 billion euros.
They have 3 major products families : * Production of tourism tyres * Production of truck tyres Others specialties (tyre for airplane, space shuttle, maps & guides, GPS…) We can see that their core business is the tire market with more than 86% of their activities. Geographically, their major market is Europe with 49. 9% of their revenues (7. 7 billion euros) followed by North America with 34. 4% and other regions with 22. 7%.
Michelin’s major market which is Europe has been declining by 7. 5% between 2005 and 2010 whereas North America gains 1. 7% and 5. 8% for the others regions as emerging countries. Through the years and to extend their activities worldwide, Michelin has developed new rands. Michelin and BF Goodrich are the two worldwide brands, established in many countries. Then, Michelin also developed regional brands such as Kleber, Uniroyal, Warrior with a strong presence respectively in Europe, North America and China. Added to these brands, Michelins created few distribution brands as Euromaster, TCI, respectively in Europe and North America. I. Market analysis Michelin is represented in two different markets: * Market of new tire This market is especially dealing with car manufacturer through partnership.
For instance, Michelin has an old partnership with Citroen which is buying big quantities of tires in order to be set up directly on their production chain. In this market, Michelin is very dependent from the car manufacturer’s market and fluctuate according to the increase or decrease of new car sales. In 2010, this market has been increasing by 15% thanks firstly to the revival of the car industry in the Western countries, mostly helped by country states and secondly to the growth of exportation to emerging countries. * Market of replacement
This market is linked with retailers, as they buy and sell tires in stores to replace a defective one. This market is less dangerous for Michelin as it is almost constant and represents ? of tires production market. Concerning the replacement market, products are distributed via dealerships and replacement service centers. This is done either via Michelin’s own distribution brands (Euromaster in Europe and TCI in North America), but also using brand partnerships and franchises to be present in 27 countries all over the world. Equipment repartition per segment| Car segment| Truck segment| Original equipment| 28. 10%| 17. 40%|
Replacement equipment| 71. 90%| 82. 60%| In 2010, the replacement market has increased by 9% in the segment of tourism and van tires in Europe with the increase of the demand for special winter tire due to severe weather condition last winter. II. Competition Michelin operates in a very competitive market with several competitors, either from Europe or emerging countries. The four main producers are Bridgestone, Michelin, Goodyear and Continental which are counting for more than 50% in the worldwide market. However, new entrants such as Sumitomo, Yokohama, Hankook and coming from Asian countries have gained market shares rapidly.
These emerging countries are developing a middle class with enough purchase power to buy either Michelin tires through distribution centers or new cars equipped with Michelin tires. As we can see on the table above, the Asian market is now growing as fast as traditional market such as Europe and North America. The most increasing market is South America which increases its demand by greatly in 2010. Furthermore, these emerging countries will account for 50% of global automobile output in 2012, showing that Michelin has to be on these markets in order to preserve its 2nd largest producer worldwide rank.
Asian market Michelin is already well implanted in the replacement segment with their distribution centers “Tyre Plus” leading the Asian market with more than 570 local centers in China and a total of 970 centers in 9 Asian countries. Michelin has also developed its own brand called “Warrior” to enter in the Asian market, especially the Chinese market in order to compete with Hankook. To be closer to the demand, Michelin has already built 3 productions sites and will add a new one in 2011 in Shenyang.
Indian market Most of the increase of Michelin on the Indian market was due to new partnership with truck manufacturer such as Tata, the biggest one in India. Michelin became an original supplier of Tata for tires in the original equipment for truck segment in 2010 helping it to increase theirs sales and to gain brand recognition. Following this path, Michelin opened 6 new truck service centers the same year and plan the opening of a new production site in Chennai in 2011. South American market
Michelin has known a significant progression in 2010 on Brazilian, Chilean, Colombian and Argentinean truck market with a global increase of 41% in the replacement market. Added to that, Michelin did few partnerships with local truck manufacturers and benefit from the 47% increase of new trucks purchases last year. * Invest in Research & Development Michelin has to face two main issues: innovation in the tire market and raw material raising cost. In both issues, R&D is a key solution. During the last years, Michelin has invested 500 million euros per year in R&D to find alternatives solution to rubber issue and keep innovating.
Cost of raw material Globally, the tire industry uses nearly 70% of world’s natural rubber production. With more than 60% of production costs depending only on rubber, Michelin is facing difficulties when there is an explosion of the price on the market. Since 2009, natural rubber price has increased by 60% and synthetical rubber, as it is made with petroleum, is increasing too. Like oil, which is also used to make synthetic rubber, nonrenewable raw materials are becoming increasingly scarce and will remain expensive in the years ahead, notably due to strong demand from China and India.
Optimizing raw material use is essential if these resources are to be conserved over the long term and if tires are to remain affordably priced. With R&D, Michelin can find alternatives materials to rubber and increase the production of synthetical rubber to replace the natural one on basic tires. Unfortunately, high performance tires will still require natural rubber, whose properties make it irreplaceable, especially for truck, farm equipment and earthmover tires. Innovation In order to compete on the global market, Michelin has to be on first line for innovation.
Michelin has started to invest in R&D to create new types of tires, which will have less impact on fuel consumption and smaller eco-footprint. For instance, in 2010, Michelin has released a new truck tire called “Michelin X Energy Saver Green”. On average it permits the standard family car to reduce fuel consumption by 520 liters per year thanks to a better road holding. This new eco-friendly product matches the demand from trucks manufacturer, states upcoming laws about transport and final clients. As several countries are becoming more and more environmental friendly.
Michelin has to anticipate the vote of laws to protect environment especially in Europe and North America, its two biggest markets in terms of sales. By increasing the production of eco-friendly tires, they would be able to face the new environmental requirement from government, organism and even from their car manufacturers partners that are already investing in hybrid and less polluting cars and trucks. Tires companies that are not anticipating these changes would not survive in this highly competitive market.