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September 02, 1996 02:00 AM

TREADCO INC.Ï®MDBO¯Bob Sell®MDNM¯, to naª tional account sales managerÏwas North American tread product/marketing manager for Bandag Inc. ² McErlaneMead BandagBandag ² ²Stotsenburg ²Dayton ² PriebeRose KellyMichelin ² HajdukiewiczMelum Nokia

Bruce Davis
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    PARIS-Group Michelin finally has achieved ``critical mass,'' allowing it to focus its resources on improving the bottom line. ``We have always had the wish of being profitable. But it is difficult to make profits in a period of strong growth, like we have known,'' said Francois Michelin in an interview with TIRE BUSINESS at the firm's commercial headquarters in central Paris.

    The company now has reached a size and situation where it can reward shareholders for their patience, said the 70-year-old ``gerant'' who is preparing the way for his 33-year-old son, Edouard, the next member of the Michelin family to take the helm.

    Heavily laden with personnel and undergoing a corporate restructuring, Michelin nonetheless has turned a $700 million loss two years ago into a 4.5-percent return on sales last year. The firm's short-term goal is a 10-percent operating return for 1996, a target the financial community both welcomes and considers realistic, especially in light of the potential for internal cost containment.

    ``The 1995 financial results...are interesting but obviously inadequate and extremely fragile when expressed as a percentage of sales,'' Mr. Michelin told shareholders at their general assembly in late June.

    ``We aim to go well beyond this to ensure the company's future and remuneration of its shareholders, to give very much flexibility in management and thus be able to meet the setbacks that are inherent in economic life.''

    This newly found focus on debt reduction and the bottom line has translated into ``buy'' recommendations from most brokerages, but these positive evaluations have not yet turned into stock market success. Michelin's share price in early August was 22 percent higher than in January, but 9 percent below the peak of the past 18 months and nearly 20 percent shy of the 290-franc ($57.75) level at which brokerages calculate it should be trading.

    Unlike the chief executives of his main competitors, Bridgestone Corp. and Goodyear, Mr. Michelin declined to peg his company's future to a market share target.

    ``The percentage of market share that you can get worldwide depends on three elements of quality: your commercial people, technical quality and the cost/price relationship,'' Mr. Michelin said.

    Explaining the firm's expansion policy for the future, he said: ``All over the world we have to make acquisitions, because we have no right to build plants which might destroy the employment of other companies.''

    Recent expansions in Poland, China, Thailand and The Philippines, along with the pending joint venture with Continental AG in Europe, fit this framework as well.

    Beginning with the development of the steel-belted radial tire 50 years ago, research and development has been at the center of Michelin's corporate strategy, and today the firm devotes an industry-leading 5 percent of sales to R&D.

    Technology will play a critical role in the firm's drive to low-cost manufacturing, Mr. Michelin said, which in turn is fundamental to the company's success in appealing to a wider range of customers.

    ``You have to be extremely sensitive to what happens in the field,'' he said in response to a question about multibranding. ``We are convinced that everybody would like to buy premium quality tires; the key is to be able to respond to the capacities of all wallets.

    ``Our main objective is to focus on making sure we can produce tires at a cost which would be sufficiently low to enable everybody to buy good quality tires.''

    The challenge, then, he added, ``is to make sure that we decrease the cost of manufacturing the tire so that we can stay in the market.''

    Mr. Michelin's concern for consumer buying habits extends beyond customers for his company's products.

    ``The automobile is still the most efficient mass transportation tool,'' he stressed.

    The company's future fortunes ``depend on the market and difficulties of the automobile industry in Europe, because you have too much regulation-about pollution, for example-...which will increase the cost of the car to a point where people cannot buy new cars.

    ``When car manufacturers are sick, by direct consequence, then we are sick, too.''

    As for keeping unit costs down, Michelin is tackling the problem on two fronts: developing the vaunted C3M automated production system on the one hand; on the other, securing a supply of tires from low-labor-cost sources.

    The designation ``C3M'' has come to symbolize Michelin's future, one of robotic plants churning out tire after tire with only a minimum of personnel. But is this a fair assessment?

    ``At the beginning, we were concerned...there might be an employment problem,'' Mr. Michelin said, choosing his words carefully. In the meantime, though, the company does not feel C3M-based factories will prove problematic in terms of staffing levels, he added.

    Asked whether this indicates a longer introduction period, or a more selective use of the proprietary technology, Mr. Michelin replied indirectly: ``You said it, not we. Things are never binary,...never black and white.''

    Independent observers calculate C3M gives the company a several-year technological head-start on the competition, but Mr. Michelin said, ``We never believe we are that far ahead.'' Instead, he emphasizes that ``by providing clients with better quality and better technological leadership and better price, profits will follow.''

    Of the major global competitors, Michelin is by far the most ``personnel intensive'' with a sales/employee ratio lower than any of the other Top 10 tire makers.

    Michelin is steadily streamliningits operation-employment is down nearly 19 percent from a few years ago-but the company likely will never reach the staffing levels of its major competitors.

    ``One should not compare things that are not comparable,'' Mr. Michelin cautioned. ``In terms of upstream technologies, we are much more integrated.''

    Michelin is the most vertically integrated of the major global players, supplying nearly all of its own steel cord and a large percentage of its elastomer needs internally.

    ``The fundamental objective of having our own elastomer production, of making our own steel cord, is so we can produce original new tires,'' Mr. Michelin noted, ``and obviously with better production costs.''

    At the same time, though, the company continues to purchase a share of its raw materials from independent suppliers ``because we have to know what is going on in the outside market.''

    Also affecting employment is the firm's core belief in solid engineering, which demands a higher level of personnel than others.

    ``Technical leadership reflects having and training good personnel,'' he said. ``A major responsibility for any boss is to ensure continuity and growth-both to shareholders and employees-and training is the key.''

    Personnel costs represented 41 percent of Michelin's sales revenue as recently as 1993, but the firm trimmed this to 36 percent last year and is forecast to cut it further to 34 percent, according to the brokerage firm Barclays de Zoete Wedd, which will translate directly to an improved bottom line.

    Debt reduction is also a key variable in Michelin's future earnings picture.

    Michelin traditionally has carried more debt than its key competitors, but brokers who follow the company have not been overly alarmed by the company's indebtedness because it has balanced this with sufficient cash flow.

    Net debt at year's end 1995 was $5.2 billion, or a debt/equity gearing of 214 percent-but this is less than half the gearing in the peak year of 1993.

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