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Michelin


France is in sore need of corporate champions these days. The youthful, successful Gallic CEO, as epitomized by Vivendi Universal's flamboyant Jean-Marie Messier, is looking more and more like a fallen idol: a victim of overweening pride, cratering stock valuations, and the now-discredited cult of the dot-com.

Those seeking to repair their broken faith in the French business Establishment should consider a pilgrimage to Clermont-Ferrand, a small town in southern France. There they will find Edouard Michelin, the CEO and scion of the French tire company that bears his name. With a nearly 20% share of the global $70 billion tire market, Michelin is the world's top tiremaker--a title it recently reclaimed from Japan's Bridgestone Corp. On the surface, Michelin looks like the very antithesis of a New Economy company: It's 113 years old, it's family run, and it makes...well, tires. It also, wonder of wonders, makes money--operating profits are expected to hit $1.06 billion in 2002, a 7% jump from last year and a strong performance in a soft global economy. "Two years ago, companies were valued on the basis of things like `return on clicks,"' says Edouard Michelin. "Today, we're all coming back to basic values."

In some ways, the fourth-generation Michelin is as conservative as they come. At 39, Edouard Michelin ranks as one of Europe's youngest bosses. A family man with six children, Edouard leads a modest lifestyle: no yacht, no jets, no $17.5 million Park Avenue apartment. His one weakness: fast cars. Parked in Edouard's driveway is a $63,000, 380-horsepower, limited-edition Audi RS4.

That Audi gives a hint that the auto industry may expect a little more flash from Michelin--especially now, the year when Michelin's CEO has finally emerged from his father's shadow. Although Edouard has run the company since 1999, when his father, Fran?ois, handed over the reins, Fran?ois stayed on as managing partner until May, when he relinquished that post at the age of 75. During his 44 years at the helm, the elder Michelin acquired a reputation as an iron-fisted boss, but he also transformed the provincial tiremaker into a global leader. Today, three giants--Michelin, Bridgestone, and Goodyear--have nearly 60% of the global tire market, followed by Germany's Continental and Italy's Pirelli.

Edouard has been with the company since 1989, when he graduated from France's prestigious Ecole Centrale. He still consults with his father regularly, yet it is clear he is eager to put his own stamp on the company. He's out to make Michelin, with $15.5 billion in annual sales, the undisputed No. 1 tiremaker worldwide, with a comfortable lead over rivals. And he wants to squeeze a bigger profit out of every single tire he sells: His goal is to achieve a consistent 10% operating margin, something Michelin has yet to pull off during his tenure. Wide margins are hard to come by in an industry whose dynamics are so hostile to profits. The investment needed to make state-of-the-art tires is huge. And Michelin, along with rivals, is under huge pressure from customers, notably automakers, to keep prices low. Just as menacing, the basic quality of a commodity tire is pretty good--good enough so that many consumers still buy on price despite greater concerns about safety.

Edouard is battling that trend with technologically advanced products that offer superior performance and command a premium. Take the PAX "run flat" tire, which Michelin will be showcasing at the upcoming Paris auto show. With a starting price of $140, the PAX can go 200 km after it has been punctured. Michelin's managers say the emphasis on top-end products has helped reverse a two-year slide in earnings: The company reported a 16% jump in operating profit in the first half of 2002, to $540 million. And the stock is up 26% in the last 12 months.

Edouard is also opening up the company--once one of the most secretive in Europe--to make it more responsive to its customers and shareholders. He allows top auto executives sneak peeks at projects inside the closely guarded research facilities at Ladoux to involve them in the earliest stages of the design process. He meets with investors every two to three weeks, the first Michelin boss to do so. The company even welcomed analysts into its Clermont-Ferrand plant and gave them a crash course in tire manufacturing. Michelin's once-chilly relations with French unions also have warmed. "Edouard is more willing to negotiate," says Herv? Carrusca, the local representative of the Force Ouvri?re union. "Before, with his father, there were no discussions."

Edouard, who honed his talents during a three-year stint at Michelin's U.S. headquarters in Greenville, South Carolina, is also streamlining management to push for greater accountability and has reached out to employees with a popular stock-option plan. "Edouard is bringing an Anglo-Saxon touch in several areas, notably in terms of relations with outside shareholders and management techniques. He clearly has his own ideas," says Louis Schweitzer, CEO of French auto maker Renault.

In his quest for global leadership, Michelin has a valuable helpmate--the Michelin Man, who goes by Bibendum in France and Bi-bi-deng in China. "No other tire company has anything like him," says Steve Saxty, executive director of automotive practice at FutureBrand Co., a New York consulting firm. You may not have noticed, but Michelin's 104-year-old mascot now sports a more muscular silhouette, the result of some discreet liposuction.

The question now is how fit Edouard can make his company. Michelin is already more profitable than Goodyear and Bridgestone, which was hammered by a tire recall at its U.S. Firestone unit two years ago. Still, Michelin's operating margins, now at 7%, have seesawed over the past decade. Investors will punish Michelin if he doesn't hit his avowed goal of 10%.

That's why innovation is critical. Michelin plows 4% of sales back into research and development, outspending rivals--with the possible exception of Bridgestone, which doesn't disclose figures. The research pays off in aerospace, too. When the Concorde resumed flights last November, the supersonic jet was outfitted with new Michelin tires specially designed to resist the kind of puncture that burst one of the plane's Goodyear tires two years ago in Paris, leading to a deadly crash. Michelin is also the exclusive supplier to the U.S. Space Shuttle program. "With Michelin's technology, we feel we're uniquely positioned, if we don't make mistakes, to be the undisputed leader," says Edouard.

A bold claim, and one that's about to be tested. The company that brought you the radial tire in 1946 is now busy promoting the PAX as the industry's first "run flat" tire. Bridgestone has rushed out its own version of the PAX, priced around one-third less, but carmakers are willing to pay a premium for Michelin's patented technology. The PAX's gel-filled interior ring ensures such a smooth ride that drivers often don't know they've gotten a flat. They're alerted by a pressure-monitoring system that the tire has been punctured and to reduce speed to 50 mph (80 km per hour). The PAX, already available on Renault's Scenic minivans, will be offered as an option on Audi's top-of-the-line $66,000 A8 sedan due out this fall and on Cadillac's upcoming luxury roadster.

Meanwhile, Edouard is backing off from customers that deliver volume but little profit. In May, Michelin dumped longstanding customers GM Europe and Fiat to concentrate on the premium end of the business. That means selling more tires like the $398, 20-inch Diamaris that BMW fits on its popular X5 SUV. "What Michelin seems to be doing is not pursuing contracts at any price," says BMW CEO Helmut Panke.

High-performance tires like the Diamaris command price premiums twice or more those of regular tires, while sales in this segment are growing by 10% a year, compared with 2% for the overall tire market. Premium tires now make up 44% of the French company's total car tire sales, up from 30% in 1998.

In the U.S., heightened brand awareness in the wake of the Firestone recall has enabled Michelin to boost market share even while it has jacked up prices by up to 6% in the past year. "We've seen a clear change in the behavior of the American consumer, with people inquiring much more before buying a tire," says Edouard. After Ford Motor Co. blamed deadly SUV blowouts on Firestone tires two years ago, Michelin's longstanding ad campaign--with its tag line "because so much is riding on your tires"--resonated with customers. "I think it's significant that their advertising emphasizes safety," says Scot Bernstein, a Sacramento (Calif.)-based securities attorney who has Michelin all-terrain tires on his Jeep and all-weather Michelins on his cherished 1978 Camaro. Jerry Nerheim, president of Waukegan Tire & Supply Inc. in Waukegan, Illinois, says Michelin tires are his biggest sellers. "Michelin is what everybody shoots at--to be as good as them. They set the standards," he says.

Since the Firestone debacle, Michelin's share of the U.S. tire market--which includes its American brands B.F. Goodrich and Uniroyal--has risen three points, to 25%. "They're raising prices [in the U.S. and Europe] and gaining market share," says Patrice Solaro, an analyst at Julius Baer in Paris. "But how long does that last?"

Edouard believes he can lock in his gains with superior service. The equipment used in the new C3M tiremaking process is so compact that it can be shipped from one facility to another in just one planeload. Yet it performs the same functions as a traditional factory. Michelin executives say the process, implemented in 2001, gives them flexibility to rapidly produce small batches of premium tires without tying up regular production lines. "It's a very valuable tool for us," says an executive at one European auto company that has used the technology. Challengers Pirelli and Goodyear have since developed similar versions of C3M.

For all his smart moves of late, Edouard got off to a clumsy start as CEO. Three months after being elevated to the post in June, 1999, he sparked demonstrations and a rebuke from the French government by announcing 7,500 job cuts the same day Michelin reported a big rise in earnings. But he learned fast. When the previous Socialist government mandated a cut in the workweek to 35 hours, Edouard agreed to negotiate with Michelin's unions, marking a break with his father's take-it-or-leave-it stance. "What people like about Edouard is that he's honest and he learns from his mistakes," says Noel Goutard, retired CEO and now supervisory board honorary chairman of auto parts supplier Valeo.

Although more mellow than his father, Edouard has still proven himself an aggressive cost-cutter. On top of the recently completed layoffs in Europe, he has kicked off a $100 million restructuring plan that will eliminate 2,000 jobs at Michelin's operations throughout the U.S. over the course of this year and the next, yielding $200 million a year in savings.

Edouard is also pursuing the aggressive global strategy his father started. On a trip to China in mid-July, he dropped in unannounced on a truck tire dealer in the province of Szechuan. Why, Michelin wanted to know, are sales of radial tires surging in China even though they cost three times more than standard tires? As local Michelin staff translated, the dealer explained that Chinese haulers routinely overload their trucks, packing 20 tons on vehicles built to carry five. The result? After a few trips, the tires burst. But steel-reinforced radials can take the beating.

They sure do. Michelin became No. 1 in China last year with a 30% share of the replacement tire market, after signing a deal to pump $143 million over three years into a majority-owned joint venture with the Shanghai Tire & Rubber Co. "Whoever is No. 1 in China and can hold on to that will be No. 1 in Asia in 30 years," predicts Herv? Coyco, head of the car and light truck tire division. Beware Bridgestone, Bi-bi-deng is flexing his muscles. By Christine Tierney in Clermont-Ferrand, France, with Ann Therese Palmer in Chicago, Chester Dawson in Tokyo, and Joann Muller in Detroit


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