GREENVILLE, S.C.-Recent maneuvers by Groupe Michelin to put itself on even firmer financial footing seem to have already succeeded in at least one area-they caught many in the industry by surprise. Still recovering from losses from 1990-93 totaling about $1.85 billion, the company startled some industry analysts with its re-cent pledge to spend $380 million to fully fund Uniroyal Goodrich Tire Co. pensions.
Even more shocking, industry officials agree, is the French firm's Nov. 16 announcement that it plans to invest between $500 million and $900 million to add tire manufacturing capacity in South Carolina.
It's not that Michelin hasn't been shoring up its bottom line, said Dave Meyer, a University of Akron management professor who follows the tire industry.
Last year the company climbed back into the black with net profits of $247.2 million, and this year it is on pace to more than double those earnings. Michelin's 1995 first-half profits soared nearly three times higher than the same period last year, to $296.4 million on sales of $6.5 billion.
The real shocker, according to Mr. Meyer, is the size of the planned investment and the earmarking of much of the firm's limited capital expenditures for one state, let alone one country.
Michelin's South Carolina plans, which will add more than 1,600 to the firm's employment roster, include:
Investing between $150 million and $280 million to build an off-the-road tire plant in Lexington;
Spending $130 million to $200 million to bolster radial passenger tire capacity in Greenville County;
Expanding truck tire capacity in Spartanburg by spending between $110 million and $200 million; and
Upgrading and expanding the semifinished products facility in Anderson County with a capital infusion of $110 million to $200 million.
Nick Colas was a little skeptical upon hearing of Michelin's South Carolina plans. But after speaking with Michelin management about the project, the CS First Boston analyst believes it's a sound investment.
At first glance, he wondered why Michelin would invest so much in North America. Although the firm has about a 20-percent share in the overall tire market and is gaining ground, profits have only been break-even or slightly better there for several years, he said.
Then Michelin officials shed a little light on the situation. The investment, Mr. Colas said, is in line with the firm's new fo-cus: its bottom line.
``This isn't just the Michelin of the 1980s: Just expand into the marketplace,'' he said. ``They're very concerned with what the return on their capital's going to be. The management at Michelin is very focused on moving from a market-share-driven company to a profitability-driven organization.''
Mr. Colas expects a nice return for Michelin from the South Carolina projects.
``The company primarily is investing in off-road and medium-duty truck tires-areas where supply is tight and profits are good,'' he said.
In addition to tapping high-yield tire markets, the investment will allow Michelin to cut its shipping costs by localizing production, Mr. Colas said. ``As I understand it, these investments are to offset what they currently have to export to the U.S.''
Although added output in South Carolina is earmarked for U.S. consumption, Michelin will utilize America as an export platform during downturns in North American tire demand, said Dennis Virag, managing director of Automotive Consulting Group, a Michigan-based consulting firm serving car makers and their suppliers.
``The U.S. is an excellent manufacturing site,'' Mr. Virag said. ``It's much better than Europe, both in terms of labor costs and productivity.''
David Garrity, a Smith Barney Harris Upham & Co. Inc. analyst, agrees.
``Certainly, one has to think France is not the cheapest place to make tires,'' he said. ``If they use the U.S. as an export platform, the investment makes sense.''
Mr. Meyer said the return on the investment will depend on how Michelin plays its cards: going for market share or profit. Michelin likely will borrow a significant amount of money to help fund the project, he said, and it'll be the terms of that funding which will dictate the firm's game plan.
``If it's five-year money, they're going to have to be a lot more aggressive than if it were 20-year money,'' he said.
``Your guess is as good as mine as to where the money's coming from,'' Mr. Meyer added. ``And the reason we won't find out where is because you can guess the strategy they're going to have to play out far more easily when you know the (loan) terms.''
Whether the loan terms are favorable or onerous, he said the return likely will outweigh the investment. ``Very little that Michelin's ever done has backfired. They're not known for making mistakes.''
Why South Carolina?
Michelin chose to invest in South Carolina because the state has a pro-business environment and vocational and educational training programs, said Carlos Ghosn, Michelin North America Inc. president and CEO.
The company recently moved its Uniroyal Goodrich subsidiary headquarters to Greenville from Akron, and five of its 19 North American production plants are located in South Carolina.
Michelin's five-year South Carolina expansion plans hinge on the state legislature's approval of various ``economic development initiatives,'' Mr. Ghosn said.
Michelin declined to further discuss its expansion plans until the state legislature votes on the incentives, but Mr. Meyer said Michelin can expect a 10- to 20-percent drop in the project's cost once the state kicks in its share. ``South Carolina has been leading the country in what we call `giving away the store,' '' Mr. Meyer said.
But there's a much bigger reason Michelin has made South Carolina its ``first preference for investment since coming here in 1975,'' according to Mr. Meyer:
``South Carolina is the biggest anti-union state out there,'' he said.``Michelin is an anti-union company. They're not going to invest in any union facility at all.''
Mr. Virag said Michelin isn't alone in its preference for a non-union work force.
``I don't think it's a big secret that people look very closely at the labor costs and the potential for work stoppages at unionized facilities,'' he said. ``It's not just Michelin.''
Michelin's employees, competitors, suppliers and customers shouldn't write this project off as ``just another expansion,'' Mr. Meyer said.
``Obviously this is a very aggressive move and it's to be taken so by Michelin's competitors and employees,'' he said. ``This project could have a ripple effect, causing other firms to squeeze everything to reduce costs and remain competitive.''
For Michelin's unionized plants, both in the U.S. and abroad, the expansion gives the firm the upper hand in future contract negotiations, Mr. Meyer said.
``Michelin's union workers should be a little worried,'' he said. ``Michelin will be able to shift capacity back to non-union facilities more easily.''
Or worse yet, Mr. Meyer said, Michelin later may opt to close a union facility.
``It's not unthinkable that they would shut down a union plant,'' he said. ``You just have to go back to the strikes at their Uniroyal Goodrich facilities two to four years ago when they went to around-the-clock operations. One need only look at which factory gave them the most trouble. I do believe Fort Wayne, (Ind.), tops the list.''
Mr. Virag agrees.
``(This expansion) poses one hell of a threat both to competitors and union workers throughout the industry,'' he said. ``It places tremendous cost pressures on the competitors. So where are they going to reduce costs? Labor is a major area; there's not much you can do with materials.''
Mr. Virag also said Michelin later may close a Uniroyal Goodrich plant.
``If you're in an overcapacity situation, you close the oldest and highest-costing plants,'' he said. ``And which ones are those? They're the union plants.''
Most of the major tire makers declined to comment on Michelin's planned expansion, but union officials voiced disappointment.
``I wish they were spending it in Opelika (Ala.),'' said Harold Watts, president of Rubber Workers Local 753 at Uniroyal Goodrich's Opelika plant.
Joe Motoycka, vice president of Rubber Workers Local 715 in Fort Wayne, said the union was told that although there will be a minimal amount of Goodrich tires produced in South Carolina, ``we shouldn't worry about losing our jobs. Only time will tell.''