AKRON—Goodyear and Dunlop, two names etched side by side in the annals of tire industry history, will now go arm and arm in the marketplace. Effective in September, Goodyear will take over control of Dunlop tire operations in North America and Europe from Japan's Sumitomo Rubber Industries Ltd., according to terms of an alliance the two companies set up Feb. 3.
As a result, Goodyear will use the Dunlop brand in North America as the ``better'' brand in a ``good-better-best'' brand strategy, giving Goodyear dealers a much needed—and asked-for—complementary brand and providing an immediate boost to Dunlop's market share in North America, Goodyear Chairman and CEO Samir Gibara said.
The deal, still subject to due diligence and approval by each firm's board of directors, would increase Goodyear's consolidated annual tire sales by $2.5 billion, or 20 percent, making the company the world's largest tire maker again.
``Becoming No. 1 was a consequence of this deal, not the aim,'' Mr. Gibara said. ``Our primary goal is to make both companies more efficient, more effective. Being the biggest is not enough, however: We also have to be the best.''
For Sumitomo—which will continue to control the Dunlop brand in Japan and most of Asia—the deal provides a needed capital boost and will lead to a larger market presence for the Dunlop brand worldwide, said Sumitomo Rubber President Naoto Saito.
Coinciding with the Sumitomo deal, Goodyear announced a series of restructuring moves in the Americas and Asia—starting with the phase-out of tire production at its Gadsden, Ala., plant—that the company expects will yield $100 million to $150 million in annual cost savings.
Under the alliance agreement, Goodyear and Sumitomo, which owns the Dunlop brand in most major world markets, will form four joint-venture operating companies—one in North America, one in Europe and two in Japan—and two support ventures, based in the U.S., for global purchasing and for sharing tire technology.
Goodyear will own 75 percent of the joint operating ventures in North America and Europe and Sumitomo 25 percent. In Japan, Sumitomo will own 75 percent of the two joint ventures and Goodyear the remaining 25 percent.
Goodyear also will have controlling interests in the two support ventures. Combining the global purchasing power of Goodyear and Sumitomo Rubber should result in $100 million to $120 million in savings annually, the companies said.
What appears on the surface to be a complex deal is actually simple, Mr. Gibara said.
``In essence, we are buying a controlling position in the former Dunlop Tyre, as it existed before Sumitomo Rubber bought them in the early 1980s,'' Mr. Gibara said. At the same time, Goodyear is not getting involved directly in Japan with Sumitomo Rubber, except for the original-equipment business with Japanese car companies and in the Japanese replacement market, ``both of which are better handled from a cultural standpoint by Japanese,'' Mr. Gibara said.
The North American joint venture will cover Dunlop Tire Corp.'s U.S., Canadian and Mexican operations with annual sales of $800 million, but will exclude Sumitomo Tire (U.S.), the San Francisco-based distributor of the Sumitomo tire brand.
Goodyear's North American tire group, including Kelly-Springfield and Goodyear's Canadian and Mexican operations, will operate outside the joint venture, but will play a key role in making the venture successful through Goodyear's distribution channels, Goodyear said.
To settle the difference between the value of the respective businesses being consolidated and the agreed-upon shareholding ratios, Goodyear will pay Sumitomo a cash settlement of $936 million the date the two ventures go into effect, Goodyear said.
In addition, Goodyear plans to acquire a 10-percent interest in Sumitomo—valued at about $100 million—and Sumitomo will acquire an equivalent dollar value of Goodyear shares, equal to about 1.2 percent. Goodyear will become Sumitomo's second-largest shareholder, and its ownership position will afford it a seat on the Sumitomo Rubber board of directors.
Definitive joint-venture agreements are expected to be signed in May, with the ventures becoming operational by Sept. 1.
``This new alliance returns Goodyear to its leadership position in the tire industry, strengthens Goodyear's leadership in North America, makes it a clear No. 2 in Europe, and provides it with a needed foothold in the important Japanese automotive market,'' Mr. Gibara said.
Although becoming No. 1 was not the overriding goal, size does matter, Mr. Gibara said.
``Economies of scale do matter. This is a capital-intensive industry, requiring high levels of technology. Even trailing the competition by only a point or two, it was tough to really have the resources in capital and technology to compete. Our competitors had more firepower.
``It also creates excitement within the company. You can ask people to do more because they are more motivated.''
Sumitomo Rubber, which employs 28,000 worldwide, had corporate sales of $5 billion in 1997. The firm's consolidated sales will fall by nearly 50 percent once the alliance takes effect, but will provide the tire maker with ``a stable, increased profit,'' Sumitomo said in a news release.
Sumitomo has been carrying more than $3 billion in debt for several years, with a debt/equity ratio of 325 percent last year, according to Morgan Stanley Dean Witter.
The deal will mesh Sumitomo's strength in Japan and presence in Europe with Goodyear's reputation in North America and Europe to lead the companies toward accelerated growth, Sumitomo said.
Sumitomo Tire is the operating name of Treadways Corp., which is not owned by Sumitomo Rubber. Treadways also controls and distributes the Eldorado, Jetzon, Laramie and Telstar brands.
Brad Dawson, Crain News Serviceer, contributed to this report.