Continental A.G. plans to boost its market share in North America by up to 2 percentage points in the coming four to five years but will source most of the added output from offshore plants.
Conti disclosed recently it will spend $305 million over four years to increase global tire capacity by 7 million car and 700,000 truck tires. The plans include a car tire plant in Brazil by 2006 and a truck tire plant in Brazil by 2008 and expansions at its Conti Sime Tyre operations in Malaysia.
The new expansion plans are in addition to capacity being expanded in Mexico and the possibility of tire manufacturing in China, Conti officials said.
The new capacity will serve mainly to supply the North America Free Trade Agreement (NAFTA) region, where Conti is forecasting the passenger tire market will grow by 11 percent, or about 38 million units, by 2008. Based on these numbers, the extra 7 million units Conti is targeting would represent a 2-percentage-point increase in the company's market share.
The plan doesn't include investment in the firm's U.S. plants, some of which the company repeatedly has characterized as its highest cost facilities worldwide.
``Our strategy is to add capacity in low-cost countries,'' the company said in a written response to questions. ``For this reason we did consider the U.S. in the first place.''
A company spokeswoman said this does not mean Conti won't be investing in North America, but that it hasn't yet formulated those plans.
The company expects to address this expanded market with tires produced in low-cost countries, the supply of which it deems is lower than necessary.
Conti's growth plan includes expanding its share of the original equipment market in North America by nearly a third-to 20 percent from 15 percent-with most of the additional 3.5 million units coming primarily from the firm's plant in San Luis Potosi, Mexico. Production there is being ramped up to 27,000 units a day.
Conti currently supplies OE tires to BMW of North America, Ford Motor Co., General Motors Corp., Mercedes-Benz of North America, Nissan North America Inc., Toyota Motor Manufacturing and Nummi, the GM-Toyota joint venture.
``The new economical capacities are just what we need to turn our passenger tire business around in the NAFTA region and to attain profitable growth,'' said Martien de Louw, Continental's executive board member responsible for passenger tires. Continental Tire North America Inc. has been in the red the past several years.
``We're always getting the message that we can't compete,'' said Mark Cheslokowski, president of United Steelworkers of America Local 850 at Conti's plant in Charlotte, N.C., when asked about the firm's offshore investment plans.
``There's no way we can compete with an ultra-modern plant in a place with low wages as well,'' he said. ``There's only so much we can do (to help reduce costs).''
Conti already has reduced output and employment at its other unionized plant in the U.S., in Mayfield, Ky., as part of a cost containment program. Employment there is down about 150 jobs since last fall to 960; output has dropped to about 11,000 units a day from 14,000, according to USWA Local 665.
In Brazil, Conti will invest $183 million in the first phase, for a passenger tire plant, and an additional $122 million to add capacity for commercial vehicle tires by 2008. The plant, in Camacari, Bahia, will be a full-fledged tire plant and not a satellite plant using the firm's Modular Manufacturing Process, a spokesman said. The project will create more than 1,000 jobs.
The new output represents a 30-percent increase in the company's global capacity.
At the same time, Conti continues to ``look hard'' at potential tire making partners in China, according to Executive Board Chairman Manfred Wennemer. He did not elaborate.
Prior to the Brazilian capacity coming on stream, Conti said, Continental Sime Tyre will expand production at its plants in Alor Star and Kuala Lumpur, Malaysia-the latter with an emphasis on commercial vehicle tires. Conti declined to specify how much capacity would be raised in Malaysia but said the expansions would create 300 new jobs there.
Morgan Stanley Equity Research views Conti's moves to cut costs as ``important to maintain competitiveness relative to larger competitors such as Michelin as well as emerging producers which benefit from lower labor costs,'' according to the company's European analyst Nicholas Hirth.