AKRON (Oct. 20, 2003)—Continental A.G.'s slow progress in North America stems from a series of miscalculations about American consumers' buying habits and a high-cost tire supply network, the firm's chairman said.
“North America is one of the most competitive markets in the world, but there's too much emphasis on price. In other markets where we compete, there's more brand awareness, more knowledge of tires by customers,” Manfred Wennemer said in an interview following his Sept. 23 keynote speech at the Tire Society meeting in Akron.
To rectify the situation, the company is taking steps to create a true good-better-best product and pricing policy, Mr. Wennemer said, by using the Continental, General and General associate brands while taking better advantage of the company's global supply network.
“In Europe, half of our tires are made in low-cost factories, but here in the U.S. it's only 10 percent,” he said. The executive made his comments only days before Continental Tire North America Inc. disclosed it will trim daily production at its Mayfield, Ky., plant by 22 percent, or 3,100 tires, and set up a new factory in the Czech Republic for high-performance passenger tires.
Earlier this year, Conti bought controlling interest in the tire business of Malaysia's Sime Darby Bhd., and will count this as a potential source of tires for North America, Mr. Wennemer said. It will take a year to 18 months before the plants there are equipped to make Conti-brand tires.
“We need various sources of supply, but we can't survive without local production in the dollar area,” he said. Besides Mayfield, the firm has facilities in Charlotte, N.C.; Mount Vernon, Ill.; and Bryan, Ohio, and San Luis Potosi, Mexico, along with a truck tire joint venture in Mount Vernon.
Conti has lost money in North America the past two years, and it could be 2005 before it sees black ink again, according to financial analysts who follow the tire maker.
Mr. Wennemer said Conti had benefited in the past few years from the strong dollar, making imports into North America cost-effective. That has changed in the last 12 months and could change again in the near future.
Besides Malaysia, Conti has production in low-cost areas such as the Czech Republic, Portugal and Romania. It will bring new capacity on stream in Russia by early next year. The company is evaluating the situation in China as well, he said, but there are many variables to consider.
The tire maker closed a plant in Mexico in 2002—“a big disappointment,” Mr. Wennemer said—and canceled plans for a satellite factory in Brazil.
In the U.S., Conti hopes to make productivity gains at its facilities by fostering competition among them, he said. That can generate “lots of internal creativity…in ways to control costs,” the executive said, citing changes workers at the Charlotte plant have made in such things as work rules, kaizen practices, lean production methods and other areas.
The firm's product mix also plays a role.
“We need to have good products in the ultra-high performance segment,” Mr. Wennemer said, both for the revenue and profits they generate, as well as the image flow down to other company products.
In Europe, for example, Conti is on course to expand the production of ultra-high performance tires (18-inch rim diameters and larger) sevenfold in the coming five years to more than 7 million units.
In his speech to the Tire Society, Mr. Wennemer also pointed to the litigious nature of the U.S. as a hindrance to progress, noting that only a fraction of the cases tried in this country would ever be heard in European courts.
“We (industry) have to pay millions here…to lawyers,” he said. “This has to change.”