The worst era of the global auto parts industry Michelin goes to conservatism
The global auto parts industry is currently experiencing its most challenging period. In April, Matthew Freeman and Michael McKenzie from the PwC Automotive Institute highlighted to reporters that auto parts dealers have traditionally used "accounts receivable" as collateral to maintain liquidity. However, with a significant drop in carmakers' production during the first quarter of 2009 and a sharp decline in global vehicle sales, automakers faced restricted access to credit, putting heavy-duty auto parts dealers at risk.
Michelin, the world’s largest tire manufacturer, was not spared from these challenges. Its 2008 financial report revealed that while sales reached 16.4 billion euros—a decrease of only 2.7%—its net income plummeted by 54%, dropping to just 357 million euros. Even more concerning was the reduction in free cash flow, which fell from 433 million euros in 2007 to 355 million euros by the end of 2008. Additionally, Michelin’s net financial liabilities rose to 4.27 billion euros, pushing its debt ratio up to 84%, an increase of 14 percentage points from the previous year.
To stabilize its balance sheet, Michelin prioritized maintaining liquidity over long-term growth. Michel Rollier, a managing partner at the company, announced that capital expenditures would be cut by 50% in 2009. This decision reflected a shift toward short-term survival rather than future expansion.
At the annual financial meeting, Michelin remained cautious about 2009, stating, “We do not have a clear outlook, not because of the bad outlook, but because we lack visibility.†The company’s finance director, Jean-Dominique Senard, emphasized that cash management was now the top priority. He noted that capital spending for 2008 had been 1.27 billion euros, but it was reduced to 700 million euros in 2009—nearly a 50% cut. This reduction signaled a major slowdown in reinvestment, which could impact long-term returns.
In 2008, Michelin had ambitious plans for emerging markets, including expanding production capacity in Brazil and acquiring land in India for a new freight tire factory. It also increased its stake in South Korea’s Hankook Tire Manufacturing Co., Ltd. from 6.3% to 10%. However, these initiatives were put on hold in 2009 as the company focused on preserving cash.
PricewaterhouseCoopers’ Freeman and McKenzie pointed out that Michelin’s decision to scale back investments indicated a temporary pause in industry consolidation. With global automotive demand collapsing, the company had no choice but to respond swiftly.
Since the fourth quarter of 2008, the entire automotive industry has been in freefall, and Michelin suffered across all regions. While the Asian market saw slight growth, Europe and North America experienced sharp declines of -7.2% and -16.5%, respectively. Globally, Michelin’s business still fell by 4% that year.
The replacement tire market also struggled, with declines ranging from 0.2% to 3.9%. Despite hopes of relying on emerging markets, Michelin found that even Asia was not immune to the global recession. Japan, in particular, faced a three-month downturn after October 2008, and China’s OEM business also saw a significant drop in the fourth quarter.
In early 2009, the situation worsened further. According to internal data shared with Deutsche Bank, global tire demand fell by 35% in January, driven by a 50% drop in OEM business and a 20% decline in replacement sales. Deutsche Bank called this the worst performance in 30 years, equivalent to a 5% reduction in global drivers or a similar number of people postponing tire purchases.
To manage cash flow, Michelin took drastic measures, including reducing production capacity. In October 2008, it temporarily shut down its Dundee plant in Scotland for a week due to declining demand in the U.S. and Europe. Later, it implemented work-sharing plans in North America to avoid layoffs and preserve cash.
Raw material prices also played a role. Natural rubber prices dropped by 60% between July and September 2008, helping reduce production costs. However, analysts like Tim Rothery from Goldman Sachs warned that cost savings might be offset by falling sales volumes and delayed price cuts.
With a combined market share of nearly 50% among the top three tire companies, the industry’s high concentration may prevent a price war. However, tire prices remained under pressure in 2009, forcing Michelin to pass on cost reductions to consumers.
Despite its strong brand positioning and technological leadership, Michelin faces long-term risks. Analysts warn that cutting R&D and production investments could weaken its competitive edge. The company’s “Horizon 2010†plan, which aimed for 3.5% annual sales growth and a 10% profit margin, is now in doubt.
While Michelin pledged to invest 600 million euros in R&D in 2009, Citi analysts remain skeptical about its ability to meet long-term targets. Goldman Sachs predicts that Michelin will need until 2011 to achieve its goals. For now, the company remains focused on survival, leaving its future growth uncertain.
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