Old world model keeps Michelin on road

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Nothing irritated Michelin managers more than the way automotive industry analysts used to lavish praise on the company’s smaller German rival Continental for doing what the analysts considered to be all the right things. Although best known for its tyre business, the German group was aggressively diversifying to become a leading automotive components supplier. It was also one of the first to offshore production in lower-cost east European and emerging regions. All in all, the German group embraced a tough Anglo-Saxon business approach setting it somewhat apart from its continental competitors.

Michelin decided to take another, perhaps less fashionable route. It opted to continue producing in its traditional mature markets at the same time as investing in emerging countries. It launched a long-term plan to modernise and improve the productivity of its plants in western Europe with the ultimate aim of making these old world facilities perform as well, if not better, than those in emerging countries. This has involved considerable restructuring in Michelin’s French and Spanish tyre facilities as well as in the US, Canada and Japan.

Some plants have been closed but those that have been kept have been strengthened.

The other pillars of the French tyre group’s long term strategy have been to avoid any potentially disruptive diversifications; pursuing its traditional commitment to technological innovation but making research and development more cost effective; and adopting a more customer-friendly approach involving much closer co-operation with its big car manufacturing clients.

Even before Continental suddenly found itself in the unusual position of being prey to a family-owned engineering group less than half its size, Michelin executives felt comforted that they had made the right strategic choice. Like everybody else in the industry, the French tyre group is having to cope with a particularly difficult environment for car manufacturers and automotive suppliers. The fall in its shares has reflected the company’s immediate challenges. But Michelin believes it is today in a stronger position in the longer term to weather the latest storm that risks becoming more violent in coming months.

Productivity is improving in the group’s western plants, and Michelin believes it can sell itself as a “green company”. Its new generation tyres are being designed to help cut carbon emissions by enabling cars to run more efficiently. The crisis in the market is also beginning to show the limits of offshoring where costs have been steadily rising. A plant manager in Poland costs more than a French one, according to a senior Michelin executive.

Quality is another problem, with products imported from emerging regions not matching the more demanding standards of western customers. Last, maintaining Michelin’s large presence in its traditional mature markets has avoided all sorts of complicated and costly logistical issues. Higher fuel and transport prices have increased the costs of importing tyres and other components from emerging regions.

As for Continental, the German group now seems to be paying the price of one diversification too far. Its €11.4bn ($18.1bn) acquisition of VDO, the Siemens car components business, has left it vulnerable to a takeover. If Schaeffler does pull off its bid it could be tempted to spin off or sell the tyre business to finance the acquisition. After all, tyres now account for only about a fifth of Continental’s activities and Schaeffler appears far more interested in VDO’s expanded car components operations.

Continental indicated a few weeks ago that it was thinking of selling its truck tyre business and Pirelli suggested it could be interested. Ironically, the Italian tyre group could eventually be tempted to pick up the entire Continental tyre business. After all, that is what it tried to do 18 years ago when it proposed merging with the Germans before being told to go away.

Michelin is bound to watch all these manoeuvres with some amusement together with a little and perfectly understandable Gallic smugness.

German super women

Peter Löscher, the Siemens chief executive, caused a big stir in Germany a few weeks ago when he suggested that his conglomerate was too white, too male and too German. The situation is not much better at other German blue chip companies where no women sit on the management board of a listed DAX30 company.

But one place where women seem to be ruling the roost is at the head of some of Germany’s private industrial dynasties. Liz Mohn has been consolidating her family’s hold on the Bertelsmann publishing group after buying out the stake of troublesome Belgian investor, Albert Frère. Friede Springer has been expanding the media empire founded by her late husband Axel Springer. And Mara-Elizabeth Schaeffler, the widow of the bearing group’s founder, could be about to pull off the biggest coup of them all with her bid for Continental.

Mr Löscher should watch out. His widely held industrial conglomerate has seen its stock market value slump and it could perhaps turn into a tempting morsel for a billionaire corporate German super woman.

european.view@ft.com

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