Tireless pursuit of innovation

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François Michelin, who ran the family tyre company for nearly four decades, liked to describe the car as a mere component of the tyre. His son Edouard, who took over from him five years ago, is following family tradition by unveiling a series of new inventions designed to reinvent the wheel.

They include an "airless wheel" to weather tough road conditions in fast-growing countries such as China and India and an "active wheel" combining tyre, wheel, suspension and its own small electric motor. "All the car is in the tyre; all you have to do is plug it into electricity," he says,speaking over a cup of coffee in his Paris office.

But what Mr Michelin calls "breakthrough solutions" are in an early stage of development and are not expected to enter the market for 10 to 15 years. "They are not part of our short-term goals - they are the advanced things we do to reinvent the wheel," he says. "We are trying to look one step ahead of our direct goal of making and selling tyres profitably. We want to make lasting improvements in the transport of goods and people."

Family tradition and innovation have long been Michelin bywords. But if the 40-year-old scion of the Michelin dynasty is as committed as his father to the company's fundamental industrial values, he has also brought about significant change in the company's organisational structure and strategy as well as in its traditionally secretive culture.

The company is far more transparent than it used to be. That is because Mr Michelin is reshaping it so that it operates as a worldwide business unit: car tyres, truck tyres and other related activities are grouped in separate management structures and more relationships have been developed with competitors and car component makers. It has created what he terms "an all-terrain capability" to enable the company to ride through rough patches as well as take advantage of the good times.

Mr Michelin is the first to admit that the car industry is not in good health. But if the atmosphere at last week's Paris motor show was gloomy, the head of the world's largest tyre maker is in high spirits. "The key elements of our strategy are bearing fruit," he says. "We have been blessed by a very good first half" - the company reported a doubling in net profits to €329bn ($404.2bn) on a 6.4 per cent rise in sales to €7.8bn. "The tyre market was above forecasts," he explains. And although in the second half markets will not be as bouyant, he is confident of "a visible improvement" in the company's full-year performance.

Why is Michelin doing so well when some of its large customers are struggling? One reason is the strength of the tyre replacement market, which accounts for 70 per cent of the world market. Another is the strategic fine tuning undertaken by the young Michelin.

After being carefully groomed inside the company, Mr Michelin has adopted an evolutionary approach to reforming one of the world's most traditional and paternalistic companies. In particular, he has promoted a selective growth strategy, strengthening Michelin's operations in the more promising segments of the market while controlling costs - something the company failed to do in the past.

"We are muscling up our activities in the west - that is, our traditional operations in western Europe and North America - and we are growing in the east, and by 'east' I mean not only Asia and eastern Europe but also South America."

Mr Michelin says that future growth of the company's production capacity will come from emerging economies in fast-growing markets - notably China, Russia, Brazil and India, where Michelin has some major projects. But he believes that it is possible to have "very efficient factories" in the west. "In the west, our strategy is not to close plants but to pursue significant productivity improvements," he notes. "What we are doing is boosting capacity in new markets."

The cost of raw materials and the weak dollar are problems for Michelin, but the company has so far managed to limit their impact. "The high cost of raw materials worries me as inflationary trends are not good for purchasing power," he says. "But for Michelin, this is not a stumbling block [because] we pass these costs on [to our customers] in our prices. Tyres are a product of necessity. You buy them because you need them. It is not like some other markets, where size depends on pricing."

As for currency fluctuations, Mr Michelin says that the company is hedged - even if it has more production in the Eurozone than sales - because the majority of its raw materials, accounting for 20 per cent of annual turnover, are largely dollar-denominated. The biggest impact has been felt in the company's large North American operations, which now account for 35 per cent of group sales in euros. "It used to be between 43 and 44 per cent when the dollar was stronger," he explains.

What really worries him is a longer-term issue. "There is a dangerous mind-set taking hold among politicians of seeking to make speed obscene," he says. He agrees that it is important to improve road transport and address pollution, noise and safety to advance what he calls "sustainable mobility". But the problem should be addressed not by reducing mobility but by improving it.

"There is a temptation these days to restrain [mobility] rather than pushing for solutions to make it better," he says. Legislators have several choices to improve road safety. "They can improve roads, which makes traffic more efficient; they can introduce things such as seatbelts, which is 'traffic neutral'; they can force cars to slow down, which is undoubtedly negative, as it slows down people and traffic. Let's not forget that speed has been part of the development of society. Not just in cars - look at the TGV high-speed trains."

Michelin's contribution is continuous innovation. The company's culture remains firmly based on a strong belief in its technical skills. Its mission is to improve mobility of goods and people, stresses Mr Michelin, an engineer by training.

And, for the foreseeable future, it will be able to preserve its independence. The company's traditional and somewhat quirky legal status as a société en commandite par actions - a French limited partnership by shares - gives Mr Michelin a rock-solid defence against a hostile takeover.

"With 20 per cent of the world tyre market, we are clearly number one, and we are also a specialised industrial company rather than a conglomerate which can be split up in pieces", he argues.

This means that, for a company founded in 1899, Michelin can preserve its long-term industrial mission. But does it not also mean that Mr Michelin is insulated from shareholder pressure? No, he insists.

"If I were doing a lousy job , I would feel it my duty to go. Anyway, I would not last very long: direct shareholder democracy and the noise of the media have become quite efficient these days."

NEVER MIND THE OLD-FASHIONED WHEEL - HOW ABOUT THE TWEEL?

Michelin unveiled three next-generation tyres at the Paris motor show last week

• The “tweel”: a puncture-proof non-pneumatic wheel comprising a rubber tread bonded to the hub through flexible spokes. Its name is a contraction of “tyre” and “wheel”. It is intended for wheelchairs

• The “airless”: another puncture-proof and retreadable tyre that does not contain pressurised air. Once the tread wears down, all that is necessary is to have the tyre retreaded. So the tyre is designed to last as long as the vehicle itself. It can be used on passenger cars and motorbikes

• The “active wheel”: this has a traction engine, so that drivers fitted with four of them can select two- or four-wheel drive. It also features an active suspension system which delivers improved handling and stability. It is designed for battery or fuel-cell powered electric vehicles which, if fitted with an active wheel, would no longer need a gearbox, clutch, transmission shaft or anti-roll bar.

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