Continental Tire North America (CTNA) Inc.'s decision to phase out tire production at its 39-year-old unionized Charlotte plant is pure and simple a bottom-line issue.
``We were looking to bring the labor cost to a German level,'' said Alan Hippe, CTNA president and CEO, in a recent telephone interview from Hanover, Germany, where he was attending parent Continental A.G.'s annual shareholders' meeting. ``In our universe here, when we compare production facilities, it's all about costs.''
Conti management has been adamant in negotiations that began last October with the United Steelworkers (USW), which represents hourly workers at the plant, that $32 million in annual labor costs must be cut at the site. That figure isn't an arbitrary number, Mr. Hippe said, it's the minimum needed to meet the average process cost of Conti's German factories.
USW officials have been equally adamant in refusing to accept the $32 million figure as gospel truth. They insist greater efficiencies at the plant would result in most of the cost-cutting needed to make the site more competitive.
``They flat-out lied to us,'' charged Ron Hoover, executive vice president of the USW. ``It's now apparent that Conti never intended to keep making tires in Charlotte. Still, it didn't stop them from raping our active and retired members.''
On May 8, Conti said it will suspend tire production indefinitely at the Charlotte facility July 7, instead of the Sept. 15 date it previously declared after not reaching a new pact with the union and declaring an impasse. The USW denounced the move and filed unfair labor practice charges against the company with the National Labor Relations Board, maintaining the action was unlawful.
On May 1-a day after its contract with the USW lapsed-Continental cut wages and health care benefits and implemented a lower pay scale for new employees. The wage reductions, about 15 percent for all plant workers, went into effect immediately, while health care benefits were slated to be cut starting Aug. 1.
The firm decided to accelerate the production shutdown because manufacturing costs had to be reduced significantly at the 1.6 million-sq.-ft. plant, and Conti needed to take ``immediate and decisive action'' to return the business to profitability, Mr. Hippe said.
Continental estimates it will cost more than $108 million to phase out tire production in Charlotte. At the same time, Conti has committed $60 million to $70 million to upgrading its non-union plant in Mt. Vernon, Ill., and spent $260 million over the past two years to build a plant in Camacari, Brazil, that will be a major source of tires for CTNA as it ramps up production.
By contrast, Conti has not made a significant investment in Charlotte in the past dozen years or so and in 2004 wrote down $64 million in assets at Charlotte to cover the depreciation of older, two-piece molds.
In addition to high labor costs, Mr. Hippe cited rising prices for energy and raw materials as other reasons Conti was unable to make tires at competitive costs in North Carolina. ``At this time, our Charlotte plant has the highest manufacturing costs of any Continental tire plant worldwide,'' he claimed.
The Charlotte plant also suffered from its status as a factory mostly dedicated to original equipment tires, demand for which waned last year along with new car sales. Converting more capacity to replacement sizes added cost because of the need for more frequent production and mold changes, USW Local 850 President Mark Cieslikowski said last year.
The Charlotte plant will remain open to handle rubber mixing, warehousing and puncture sealant operations, Conti said. About 130-140 workers will be retained to handle those duties, said Rick Holcomb, legal counsel for the tire maker.
The company's plans are the same as they were at its plant in Mayfield, Ky., Mr. Hoover said. ``Stop making tires, but mix just enough rubber where they can try to deny shutdown benefits to a thousand workers, many with 20 or more years of service to the company,'' he claimed.
About 172 hourly and salaried employees were laid off May 12 and another 50 salaried positions will be eliminated on June 30. About 481 hourly and salaried employees face layoffs in mid-July.
Conti said it will work with federal, state and local government officials to provide transition assistance to ousted workers. It also planned meetings with the USW to negotiate layoff benefits for displaced hourly employees.
``If the union had agreed to reduce costs by $32 million we would have continued to produce tires there,'' Mr. Holcomb said.
Not so, said Mr. Cieslikowski. For months, he maintained, Conti was preparing to fold up its manufacturing tent in Charlotte and move production elsewhere, and that prophecy did come to pass.
Mr. Hippe said production at Charlotte will be relocated to lower-cost facilities in Mount Vernon, Ill.; Camacari, Brazil; San Luis Potosi, Mexico; and perhaps a European plant.
Those factories, along with Continental's GTY Tire Co. truck tire joint venture in Mount Vernon, are key elements of the North American unit's growth plans for the next several years.
The business has not been profitable-partially because of its high cost structure, partially because ``we need to develop more products and better marketing,'' he said.
Tires can be produced in the U.S. if companies use the right cost structure, technology and labor costs, according to Mr. Hippe, who pointed to the streamlining and upgrading of the firm's 32-year-old Mt. Vernon site as evidence.
The firm's plan there calls for it to hike efficiency and productivity through a combination of capital improvements and restructuring of tire operations. Capital improvements will turn it into a state-of-the-art facility, Mr. Hippe said.
However, in January workers at the plant were hit with a 10-percent reduction in wages for hourly employees, who also now contribute to Conti's health insurance program, which they didn't do in the past. Salaried employees had their pay reduced in recent years and make health care contributions.
Conti also took $33.5 million in impairment losses on its fiscal 2005 books to cover the writing down of assets at the Mt. Vernon plant.
Conti's new tire factory in Camacari started production April 5 and should be turning out 9,000 passenger tires a day by year-end. It will increase production to 14,000 tires daily in the first half of 2007 and will have the capacity to produce 6 million passenger and 700,000 commercial vehicle units yearly by 2007 or 2008.
``We have been prepared for every alternative,'' Mr. Hippe said. ``There will be no problem on the supply side because we have plenty of tires stored'' and ample production capacity available at the company's remaining North American plants.
``Our Mexican plant is producing tires for the U.S. right now, and the plant in Brazil will be contributing soon,'' he said. Conti also ships tires to North American Free Trade Agreement (NAFTA) nations from Europe and its Continental Sime Tyre joint venture in Malaysia.
While lower manufacturing costs have been the dominating theme of CTNA's plan to return to profitability, it's certainly not the only factor, Mr. Hippe said.
``It's one element of our strategy, but lower pricing is not the target,'' he said. ``We will sell a good tire at a good price. We are losing money producing passenger car tires, but not truck tires or off-the-road tires, where there's a huge demand right now.''
Conti's success all starts with the product, the official said. And, with its cost structure falling into place, that's what it will concentrate on in the future.
The company has launched a focused marketing campaign in California, and it has another campaign in the works, he said. ``We need to do more with our image, and we need to do more in tire marketing and sales in North America.''
It's also creating offerings, with six new lines unveiled last year and more likely for 2006, Mr. Hippe said. It will take some time for Continental to come up with a complete product range, he said. ``But we'll do it. If you see our success in Europe, I think we can do it in the U.S.''
Possibly, but not likely, said retired USW executive John Sellers, who also attended Continental's annual shareholders meeting in Germany. He said that Conti has held an advantage over competitors in North America in terms of labor costs-and that hasn't helped the company.
``Despite a $2-an-hour advantage, Conti's performance (in the U.S.) has been weak at best,'' he said. ``They still don't understand how the U.S. market differs from Europe, and now they expect the workers to pay the price for the ignorance of their arrogance.''