AKRON (Sept. 2, 2003) — Group Michelin's deal earlier this year to buy a 10-percent stake in South Korea's Hankook Tire Co. Ltd. is a more wide-ranging agreement than originally disclosed, according to analysts who cover Hankook.
The deal offers Hankook access to Michelin's distribution networks in Europe and North America and gives Michelin a chance to tap into Hankook's low-cost manufacturing in Korea and China. At the time of its signing earlier this year, the deal was portrayed as an expansion of the companies' agreement to cooperate on Michelin's Pax extended-mobility tire-wheel system.
“Hankook Tire is making a fundamental change to the way it sells tires,” said Eric Choe, author of a study by ABN Amro Asia Ltd. on the tire company. “Its partnership with Michelin and a revamp of its overseas distribution should see it post compound 28-percent earnings growth to 2005.”
Michelin now will ship Hankook tires through its own distribution networks in Europe and North America, according to the ABN Amro and other analysts' reports, allowing Hankook to reduce the complexity of its distribution and thereby lower its distribution costs while retaining more of its margins for itself.
“Hankook's weak point has always been marketing, weak branding, inefficient distribution and low pricing power,” Mr. Choe wrote.
Michelin, in return, gains access to Hankook's low-cost production in China—where Hankook has committed about $250 million over seven years to triple output—and to Hankook's Korean distribution network and OE presence. The latter is key to Michelin's goal of expanding the Pax concept globally.
Michelin plans to source about 9 million to 10 million BFGoodrich-brand tires from Hankook plants for sale in North America, according to a report by Goodmorning Shinhan Securities in Seoul, South Korea.
Commenting on the deal in the company's 2002 annual report, Hankook CEO Cho Choong Hwan said tying up with Michelin will help elevate Hankook's “technological prominence and brand image,” a fact that “is expected to have a profound effect on the company's ability to increase sales prices.”
Separately, Hankook stepped up a notch on the global arena in March, securing a contract with Ford Motor Co. to supply up to 550,000 tires annually for Ford's newly re-designed F-150 pickup truck. This expands Hankook's annual supply arrangement with Ford to more than 1.3 million tires.
Hankook also is an original equipment supplier to General Motors Corp., Renault S.A. and others. It anticipates generating $35 million in sales this year from the export of tires to overseas OE clients.
Meanwhile, Hankook reported triple-digit increases in operating and net earnings for the first half of 2003 as sales rose 13.9 percent. For the period ended June 30, Hankook said its operating income rose 127 percent, to $83.3 million, and net earnings were up 123 percent to $53 million.
Sales climbed to $706 million. As a result, the operating and net earnings/sales ratios rose to 11.8 and 7.5 percent, respectively.
The sales gain is attributable to higher unit prices, the strong euro to won exchange rate and higher volumes, especially performance tires, according to Daewoo Securities Co. Ltd.
But the second half likely won't produce such strong results, analysts said, as the euro/won exchange rate stabilizes and the company idles some production capacity in preparation to convert bias truck tire capacity at its Kumsan plant to high performance radials. It also is shifting capacity at its Daejon plant to 16-inch and larger diameter tires.
In fiscal 2002, Hankook posted a 12.4-percent rise in sales, to $1.4 billion, with exports outside of Asia accounting for slightly more than half of sales. Sales in North America jumped 28 percent to nearly $185 million. Europe is the firm's largest export market, accounting for $232 million in sales last year.
In China, the company eyes a doubling of output to more than 15 million units by 2006 and then nearly doubling again to 28 million units by 2010, according to the business plan outlined in the firm's 2002 annual report.
Likewise, sales from the Chinese operations should nearly double by 2006 to $436 million and then double again to $903 million by 2010.
Hankook claims a 6.3-percent share of the Chinese tire market, including a 25-percent share of the passenger OE business there, according to the annual report.
The deal with Michelin should dovetail well with Hankook's Chinese operations, ABN Amro's Mr. Choe said, helping Hankook keep capacity utilization up at the ex-panding plants there.
Meanwhile, Michelin—with two plants of its own in China—claims market leadership in China in radial tires, including a 20-percent share of the OE market.
Among its objectives in the coming years is the establishment of 150 Tyre Plus sales outlets there, the company said in its 2002 annual report.