FINDLAY, Ohio (April 25, 2003)—Cooper Tire & Rubber Co. plans to expand its offshore tire sourcing agreements to remain competitive in the North American replacement market and increase its profit margins.©
The new agreements will augment North American capacity and “more likely than not” be accomplished through partnerships rather than acquisitions, President and CEO Thomas A. Dattilo said during the company's first-quarter earnings conference call April 17.
New pacts could come with either its current Taiwanese partner, Kenda Rubber Industrial Co. Ltd., or with other tire makers.
Cooper plans “minimal” capital investments—significantly less than $100 million over the next two to five years —to increase its Asian-sourced product, Mr. Dattilo said.
To remain competitive and to be able to address all segments of the replacement market, Cooper has to come up with a solution “to the flood of Asian product into the U.S.,” said Cooper Tire President Richard Stephens.
“You either fight it or you join it,” he said. “We're joining it.”
The offshore sourcing strategy along with top-line growth will help Cooper re-attain its goal of 10-percent profitability in its tire group, he said.
During the first quarter of this year, Cooper Tire's operating margin was 4 percent, down from nearly 10 percent during the same quarter of 2002, because of lower volumes and higher raw material and energy costs, the company said.
The Rubber Manufacturers Association is projecting growth for the North American replacement market in 2003, even though the first quarter was off significantly, Mr. Stephens said.
The RMA is forecasting the passenger replacement market in 2003 and 2004 will see an annualized growth rate of nearly 3 percent, mainly attributable to a rebound in the economy in combination with increased replacement of P-Metric tires that were part of the Firestone recall and replacement programs that will reach the end of their product lifecycle. The group also is projecting the replacement light truck tire segment will average an annualized growth rate of over 3 percent through 2008.
“Our growth in North America will be through off-shore arrangements rather than expanding North American capacity,” Mr. Stephens said. “There's no plans at this point to downsize any tire production in North America.”
The industry is well aware of the trend toward off-shore sourcing of tires, said one analyst.
“Right now, it's very clear to me that Cooper is the low-cost producer in the North American industry,” said Rod Lache of Deutsche Bank Alex. Brown. “But if they want to remain the low-cost producer, they're going to have to shift production to low-cost areas.”
Cooper established a sourcing agreement for passenger vehicle tires with Kenda nearly two years ago. The Taiwanese company ranks No. 31 among global tire makers with 2001 tire sales of almost $180 million generated from plants in Taiwan, China and Vietnam.
“Since we've already been doing that, you could say that we'll be expanding that type of an arrangement,” Mr. Stephens said, with Kenda and possibly other tire makers.
Cooper currently markets the tires Kenda produces under the Cooper and Avon brand names and distributes them through its Melksham, England, operation to European customers. The two tire makers also have an off-take pact under which Kenda produces bias light truck tires that Cooper has sold in the U.S. and other markets since 1999 when it stopped producing its own bias tires.
Cooper's competitors all have a presence in the Asian region.
Goodyear has eight plants in Asia and joint venture units in Australia and New Zealand. Michelin operates two plants in China, one in Japan, three in Thailand and recently took a 10-percent equity stake in South Korea's Hankook Tire Co. Ltd.
Bridgestone Corp. has 16 tire plants in Asia, including eight in Japan and two each in China, Indonesia and Thailand; last month it announced it would invest $99 million to build a third, wholly owned manufacturing operation in China to supply tires to original equipment and replacement customers domestically and for the export market.
Hankook and Kumho Industrial Co. Ltd., which both sell tires into the U.S. market, produce tires exclusively in China and South Korea.
“I think other companies have moved in a much more significant way to develop sourcing strategies in those markets,” Mr. Lache said, pointing to all of the investment Goodyear and Michelin have made in that region. “Cooper has to respond to that.”
Roger Hendriksen, director of investor relations for Cooper, argued that Cooper's intent in the Asian region differs from its competitors'. “We are not trying to supply the Asian market over there; our strategic focus is and has been the North American replacement market..and to supplement the European market.”