Goodyear: Still Spinning Its Wheels


By Christine Tierney When the Ford Explorer-Firestone Tire safety scandal hit the headlines three years ago, the clear beneficiary appeared to be Akron (Ohio)-based Goodyear Tire & Rubber. After all, Goodyear's vaunted brand got a big lift from reports of sudden blowouts and rollovers involving Ford SUVs equipped with tires made by rival Firestone, which is owned by Japan's Bridgestone. Not only did Ford (F) rush to replace millions of tires on its Explorer SUVs, some of them with Goodyears, but consumers shopping for replacements on their own increasingly looked to reputable name brands. Given Goodyear's unblemished reputation, it looked like the company was poised to accelerate and leave its rivals in the dust.

That's not the way it turned out, though. After an immediate 50% falloff in its stock price after the scandal broke, global tire maker Bridgestone (BRDCY) eventually stabilized its U.S. business. Its stock was selling around $26, as of May 27. Meanwhile, Goodyear (GT) shares have plummeted more than 80% since the tire scandal hit in the summer of 2000. It closed at $6.48 a share on May 27, far from its 52-week high of $22.90.

What happened? In an unexpected reversal of fortune, Goodyear wasn't able to reap the benefits of its rival's woes. "We didn't think Firestone would be around in 2003, but Goodyear should have been gold," says Dennis Leipold, owner of Leipold Tire Co. in Cuyahoga Falls, Ohio. "The opposite happened."

U-TURN. Goodyear isn't about to expire, but it faces some daunting challenges. The tire manufacturer lost $1.1 billion in 2002, vs. a $204 million loss in the previous year. And the hemorrhaging hasn't stopped: In the first quarter of 2003, it lost another $163 million. New CEO Robert Keegan, who took over from Samir Gibara on Jan. 1, is grappling with huge debts, frustrated tire dealers, and disaffected investors.

To Keegan's credit, he has moved quickly to turn the company around. He staved off a cash crunch on Apr. 1 by restructuring $2.9 billion in bank debt and stretching out payments. He has sold an $83 million stake in Sumitomo Rubber Industries and, in a return to core competencies, plans to shed Goodyear's chemicals business. On Apr. 30, Keegan said he expected to slash costs by up to $1.5 billion by the end of 2005 and triple the return on invested capital to 15% to 20% in that period.

Keegan and Goodyear North American tire-division chief Jon Rich have also promised to fix logistical snags that left dealers unable to satisfy customer orders. Ironically, these problems were exacerbated by the Firestone debacle. As Goodyear scrambled to meet Ford's demands, it lost sales in the more lucrative consumer tire-replacement market. Dealers already see an improvement. "We're getting almost 100% of our orders filled now," Leipold says.

UNEXCITED INVESTORS. Still, it will be tough for Keegan to win back investors any time soon. After he unveiled his targets in April, the stock rallied 15%, but Wall Street remains skeptical. "Given Goodyear's history of raising investors' expectations and failing to live up to them, we are wary of becoming too excited," Merrill Lynch analyst John Casesa wrote in a report. He still rates the stock a sell, after downgrading it in February when the company eliminated its dividend to save cash.

Analysts want to see a detailed restructuring plan. Keegan says he can't deliver that until the company is finished with ongoing labor union contract negotiations with the United Steelworkers' union. The union opposes any U.S. plant closures. Labor's cooperation is crucial, the company says, since Goodyear's biggest trouble spot is the North American tire division.

In the first quarter of 2003, that unit's operating loss widened to $61.5 million, from $51.3 million a year earlier. Analysts say Goodyear has been too slow to transfer production from the U.S. to lower-cost regions, such as Latin America. According to internal estimates, production costs are too high on around 15% of Goodyear's North American output, and that production will have to be shipped abroad unless the management works out a way to slash costs in the U.S.

LETTING THE AIR OUT. Even if Goodyear can execute a successful, multiyear restructuring, analysts at Deutsche Bank estimate the stock would be worth only $7 because of the company's existing liabilities.

At Goodyear's annual meeting on May 7, Gibara said he would also step down as chairman on June 30 and leave the board altogether. While shareholders are happy to see a new team in charge, both Keegan and Rich are new to the tire business. Still, they bring impressive credentials to the task. Keegan was hired from Kodak (EK) in 2000, where he successfully turned around the consumer film business. Rich joined Goodyear's chemical unit in 2000, after 18 years at General Electric (GE).

Even so, some analysts think there's just no replacement for knowledge of the sector. "Their competitors at Michelin, Bridgestone, Cooper (CTB), and Pirelli are seasoned tire executives, and the tire business is a very complicated business," says Saul Ludwig, an analyst at McDonald Investments in Cleveland, who rates the stock a hold. Tire executives must contend with more than 150 brands on sale in just the U.S., as well as a multilayered distribution network.

SKID MARKS. Adding to management's difficulties, the industry is in a slump, and auto makers are badgering suppliers to cut prices. While that's bad news for everyone, Goodyear is in a weaker position than similarly-sized global rivals Michelin and Bridgestone. Those companies are stronger in their overseas home markets of Europe and Japan, respectively, and that gives them the resources to compete aggressively in the U.S. And bolstered by its parent Bridgestone, Firestone is doing just fine. Last year, Bridgestone's American sales rose 30%, helped by a rebound in the Firestone brand in the second half of the year.

For Goodyear investors, there's still no sign of traction in Keegan & Co.'s efforts to propel the venerable tire maker forward again. And for now, that's where the rubber meets the road. Tierney covers the auto industry for BusinessWeek in the Detroit bureau


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