The global auto parts industry is facing the worst times.
In April, Matthew Freeman and Michael McKenzie, researchers at the PwC Automotive Institute, pointed out to reporters: “Traditionally, auto parts dealers rely on 'accounts receivable' as collateral to protect their liquidity cash. .
However, with significant reductions in carmakers' capacity in the first quarter of 2009 and a serious decline in global car sales, automakers’ access to credit is limited, and heavy-duty auto parts dealers are in danger. â€
Michelin (MICP.PA), the world's largest tire manufacturer, is not immune. Michelin's previous 2008 financial report showed that although it achieved sales of 16.4 billion euros, only fell 2.7%, but its net income plummeted 54% to only 357 million euros.
Even more dangerous is that at the end of 2008, the free cash flow held by Michelin was 355 million euros. In 2007, this figure was 433 million euros. And its net financial liabilities amounted to 4.27 billion euros, and the debt ratio rose by 14 percentage points from 2007 to 84%.
Michelin management has put “keeping the balance of balance sheet†at the top of the list, even if it may jeopardize Michelin’s long-term growth plan. Michel Rollier, managing partner of the group, said that the group will reduce its capital expenditure in 2009 by 50%.
Investment Waist
At the annual financial report meeting, Michelin avoided the prospect of 2009. "We do not have a clear outlook, not because of the bad outlook, but because we do not have enough visibility." He Liye said.
In the face of uncertain prospects, "cash is king" has become Michelin's choice. Michelin's finance director, Jean-Dominique Senard, confirmed on February 13 that the company needed to take advantage of this year's capital expenditures.
Senard emphasized that cash management is the current priority of Michelin. "Our capital expenditure in 2008 was 1.27 billion euros, but this year it was 700 million euros, almost 50% of last year." The amount of capital expenditure is generally regarded as the degree of enthusiasm of companies for reinvestment, and it will also significantly affect the long-term Return on investment.
The reduction in capital expenditures means that Michelin may have difficulty keeping its series for emerging markets in 2008. He Liye revealed at the 2008 Paris Motor Show that it will increase the production capacity of passenger car and light truck tires in Brazil, and is about to close a deal to purchase land parcels in India. Michelin intends to build a new freight car in India. Bulldozer tire factory. In addition, in June 2008, Michelin increased holdings of South Korea's Hankook Tire Manufacturing Co., Ltd. from holding 6.3% to 10%.
However, since 2009, Michelin has not announced any major investment issues.
“Under normal credit conditions, mergers and acquisitions have always been a decisive force for the auto parts industry to adapt itself to the market.†PricewaterhouseCoopers Freeman and McKenzie pointed out that Michelin’s move meant that it temporarily stopped the integration of the industry.
Comprehensive decline
Since the fourth quarter of 2008, the automotive industry has collapsed on a global scale and Michelin has been forced to respond. The previous year, Michelin recorded poor performance in almost every department and market.
In the OEM market for passenger car and light truck tires, although the Asian market enjoyed a slight growth of 1.9%, South America and the Africa/Middle East markets also recorded significant annual sales growth of 8.2% and 13.8%, respectively, but Michelin in Europe and North America respectively. Encountered a large decline of -7.2% and -16.5%. That year, the business still fell by 4% globally.
The same situation also occurred in the tire replacement business of passenger cars and light goods vehicles, and truck OEM and replacement business. During the year, these three businesses recorded annual declines ranging from 0.2% to 3.9%.
Michelin has been hit by hopes of buffering in emerging markets. He Liye said: "The market has spoken and explained why we achieved such a performance in 2008."
According to its disclosure, in the future, Asian operations will not be immune to the Great Recession. Asian business experienced a three-month recession after October 2008, especially in the Japanese market. “Even in China, the OEM business in the fourth quarter also recorded a significant decline.†New cars released by Chinese automakers since the fourth quarter of last year have significantly reduced the purchase of higher-priced Michelin tires and used cheaper tires.
In 2009 there was also a lack of a good start. According to Michelin's non-public data submitted to Deutsche Bank, in January, global tire demand recorded another 35% decline, due to the ups and downs of 50% in OEM business, and the decline in replacement business maintained at a high level of 20%. .
Deutsche Bank pointed out that this is the worst number in 30 years, which is equivalent to a 5% reduction in global drivers, or that an equal percentage of drivers postponed their tire purchase plans.
Forced contraction
With tough demands for withdrawal and preservation of funds, Michelin has chosen to slash its production capacity.
In October 2008, Michelin shut down its factory in Dundee, Scotland, for a week to cope with the declining demand for tires in the United States and Europe. In November and December, the plant also stopped production for 48 hours.
At that time, Michelin stressed that this did not involve layoffs, just to avoid stockpiling. In December 2008, Michelin announced that its three plants in Nova Scotia will extend production during Christmas. On March 27, 2009, Michelin announced a 18-week work-sharing plan in North America that will reduce the number of hours per employee, instead of layoffs.
To ensure cash flow, controlling costs is equally important for Michelin. The good news is that the price of raw materials has fallen.
Jean-Dominique Senard said that from July to September 2008, the price of natural rubber (information, quotes) as a raw material dropped sharply by 60%. "This helps to greatly reduce our production costs." Citi estimates that in 2008, the cost of Michelin spent on rubber (information, market) was 176 euros per kilogram, and this year it will drop to 129 euros per kilogram.
But Tim Rothery, an analyst at Goldman Sachs, pointed out to the newspaper that the other side of the problem is how much money Michelin can save, largely because of its sales volume. "Michelin's profitability trend depends on the extent of sales declines and the timing of price cuts. These two factors will eliminate the benefits of cost reduction."
The high concentration of the tire industry can alleviate this problem? According to 2007 figures, Michelin’s global share is 17.1%. The remaining two major tire giants, Bridgestone and Goodyear, have 16.9% and 14.9% respectively. In terms of share, the three together have mastered almost half of the global share.
Rothery believes that the high degree of concentration in the industry makes it difficult for price cuts to evolve into price wars. What's more, the current industry profit margins have been rather sluggish. However, before the second half of 2009, tire prices will remain under pressure, and Michelin must pass on the benefits of cost reduction to consumers.
Worry about the future
Freeman and McKenzie stated that according to past industry recession experience, auto parts dealers with higher value-added products and high market share should have been the winners after the end of the industry downturn.
Falk Frey, a senior vice president at Moody's in Frankfurt, told this newspaper that Michelin has always maintained its high-end brand positioning through technological innovation and manufacturing of high-quality tires, while high-end brands have enabled Michelin to enjoy a premium in product pricing.
Credit Suisse, an analyst who does not want to be named, also told this newspaper that in the highly competitive European auto parts business, only technological innovation leaders can win the race. "I firmly believe that only technology leaders can make more profits. In the end, we think that customers will only pay for auto parts that contain advanced technology, and Michelin has been a technical automaker that I have been looking for."
"But even for such strongmen as Michelin, there is still a long-term risk of not being able to survive. In the current context of cash as king, reductions in R&D investment and new production capacity will surely emerge, and these long-term measures to preserve cash It will affect the competitiveness of related auto parts suppliers,†said Freeman and McKenzie.
The doubts of investors are that in order to cut spending, Michelin, which has always won with technology, may reduce its investment in research and development, and it will not be able to recover after the crisis. In the long run, a Michelin who has become conservative will not be able to achieve the promised performance growth target.
According to the "Horizon 2010" plan announced by Michelin in 2006, by 2010, it will achieve a series of goals. Including annual sales growth of 3.5%, profit margin of at least 10%, positive free cash flow, limiting inventory to 16% of total sales, and return on invested capital exceeding 10%.
“Capital expenditures were cut by nearly half year-on-year in 2009, which is indeed necessary from the point of view of liquidity. But at the same time, this also threatens Michelin’s 'horizon 2010' plan, which means that after the market recovers, Michelin may not be able to return to crisis. The previous level of growth.†Citi analyst Kristina Church expressed concern about this newspaper. In his opinion, "Michelin is now far away from the above target."
On this issue, Michelin's latest statement was in October 2008. Didier Miraton, head of research and development at the group, claimed that in 2009, it will invest 600 million euros, or slightly more, in research and development, compared with the 2008 R&D investment. If
However, Citi pointed out that in 2009, Michelin's funding situation will continue to deteriorate, so in the future, Michelin's attitude on R & D investment will be re-examined, still doubtful.
Goldman Sachs believes that Michelin's "2010 Horizon" plan will not be completed within the deadline, Rothery said, "We predict that Michelin will need to reach the above target by the end of 2011." Michelin China said in April that it is not a good time to talk about this issue. .
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