Likely to Get Worse Before It Gets Better

Michelin: Likely to Get Worse Before It Gets Better Overview Michelin is finding that the competitive adorn is changing. It is a pureplay tire order, and has enjoyed a position of leadership in the two largest arenas of atomic number 63 and the United States, with global market assign of 19%. The company also has a super-premium price position, with its retail prices 25% above the branded competition and 80% above the cheapest competitor. However, Michelins position is being threatened in both Europe and the United States, as low- personify Asian (especially Korean) manufacturers rapidly make inroads. The company is not well-positioned to counteract the advance of the Korean tiremakers because of its uncompetitive cost base. In an industry where labor cost is a key strategic lever and the raw materials are commodities, 75% of Michelins exertion is in high-cost locations (primarily western Europe and the United States). The companys stated strategy is to reduce costs by raw(a) labor attrition, but this tactic so far has resulted in headcount reductions of only 2% per year. In our view, this no hurting approach to a worsening competitive environment reflects a need of a pressing need to take uncomfortable decisions give adequate earnings.

We believe significantly worse numbers will be needed before restructuring gets serious. Contrary to what might nourish been expected, increases in raw material prices over the past two years crap brought about margin expansion in most of the tiremakers through 2005. However, we have recently had a spate of profit warnings from Michelin, Bridgestone and Goodyear, reflecting the fact that it has become more and more difficult to pass on raw material prices to consumers. In our view, valuing Michelin depends on an assessment of the companys normal earnings power exhalation forward. Long more profitable than the industry â€" with 10-year average in operation(p) margins of 8% compared to the industry average of 5.8% â€" we expect... If you want to get a full essay, order it on our website: Orderessay

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