ANALYSIS : Michelin-Uniroyal Deal Shows Foreign Investors’ Savvy
What does it mean that Michelin Group of France is buying Uniroyal Goodrich and becoming the largest tire company in the world and a stronger force in the U.S. market?
The stock market decided Friday that it wasn’t so good for Goodyear. The stock of the last remaining U.S.-owned major tire maker fell $1.25, to $53.625 a share, on news of the Michelin deal.
“The market obviously thinks that Michelin makes Uniroyal Goodrich a more formidable competitor,” says Harry Millis, the veteran tire analyst of Cleveland’s McDonald & Co. investment firm.
The major tire producers have been investing heavily to expand and modernize their U.S. operations in the last two years, Millis explains. But Uniroyal Goodrich couldn’t afford the effort because it was overloaded with debt, the result of a leveraged buyout. Now Michelin’s money will allow it to compete with the big boys.
So Goodyear gets yet another foreign competitor--the last thing the Akron, Ohio-based company needs in the $12-billion sales U.S. tire market, where it holds the leading share.
New Investment Poured In
In the last few years Goodyear has seen domestic competitors that it had left in the shade suddenly revived by foreign purchasers. In 1988, Bridgestone of Japan bought Firestone; Continental Gummi of West Germany bought General Tire in 1987, and Pirelli of Italy owns Armstrong Tire.
All the foreign buyers have poured new investment into their U.S. operations--Bridgestone as much as $1.5 billion--putting in capacity for high performance automobile tires and radial truck tires. The foreigners didn’t invest for the fun of it, of course. They saw business opportunities.
Which raises a now sadly familiar question: Why didn’t the tire industry’s American owners see the same opportunities and act on them?
“The owners of those firms had been withdrawing capital from the tire business, looking elsewhere for a higher near-term return,” says analyst Millis. “The foreign firms take a three- to five-year--and sometimes a 10-year--view.”
Does it matter that the tire business is now mostly owned outside the United States? This is an old-line U.S. industry, after all. Rubber has been the main business of Akron, a city of 230,000 on the Cuyahoga River, since the last century. Tire names such as Firestone and O’Neill and Goodrich dominated Akron the way the name Michelin dominates Clermont-Ferrand in France, home of the family-owned Cie Michelin for the last 100 years.
Interestingly, it was Michelin that introduced the challenge of new technology that changed Akron and the tire business. Michelin invented the radial tire, which won increasing acceptance outside the United States before it came here in the 1960s. But U.S. tire makers resisted adopting radial production because it demanded expensive new machinery and a whole new manufacturing system. They tried to stay with older bias-belted tires.
But when Sears, Roebuck & Co. in the 1970s began to sell Michelin radials and Detroit auto makers talked of adopting them, the Americans were forced to change. Goodyear did so most forcefully and successfully because it was willing to make the needed investment. Other companies either shortchanged the new tires or suffered expensive product failures. And after that many of the old tire families lost heart and withdrew from the business.
That left Goodyear king of the hill for a while, secure atop the U.S. market and able to spread its operations to Latin America, Europe and Asia.
But of course the big foreign tire makers weren’t going to be left out of the American market. They have hurried in to buy companies the Americans left behind, and the business is strongly competitive today.
Goodyear’s share of the U.S. market remains around 30%, but with the acquisition of Uniroyal Goodrich, Michelin becomes a strong No. 2 at perhaps 27%. Globally, Michelin is now first at roughly 22% of the $40-billion market, with Goodyear second at 19%, Bridgestone third with 16.5% and the rest following behind.
What’s the upshot? That the humble tire has gone as far as any product to become completely global, with producers operating on every continent and product standards pretty much the same everywhere--you have no reason to fear a blowout in a foreign country any more than in the United States.
Nor, when you think about it, is there any reason to fear the industry’s foreign investment. Clearly, it has done a lot more for Akron and U.S. tire making lately than some of the first families of American industry have done.
