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5. MICHELIN (Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2018

MICHELIN (Compagnie Generale des Establissements Michelin S.C.A.) Business Report FY ended Dec. 2018

Factors
1) Net Sales
-The Company’s net sales for the fiscal year ended December 31, 2018 increased by 0.3% from the previous year to EUR 22,028 million. Increases in sales volumes contributed an additional EUR 195 million, while changes in consolidation scope, primarily from the acquisition of Fenner and deconsolidation of TCi added EUR 267 million. A favorable price-mix effect contributed an increase of EUR 444 million for the year. Finally, unfavorable currency effects caused a decrease in sales of EUR 838 million.

2) Operating Income
-The Company’s operating income totaled EUR 2,775 million for the fiscal year ended December 31, 2018, an increase of 1.2% over the previous year. The increase in operating income was caused primarily by an increased scope of consolidation due to the acquisition of Fenner, increased sales volumes, and positive price mix effect. These gains were partially offset by increased raw material costs.

3) Automotive tire sales
-Sales from the Company’s Automotive tire and related distribution segment in the fiscal year ended December 31, 2018 decreased 5.1% from the previous year to EUR 11,340 million. The decrease in sales was primarily due to the deconsolidation of TCi and negative foreign currency exchange effects.

4) Road transportation tires
-In the fiscal year ended December 31, 2018, the Company’s Road transportation and related distribution segment had sales of EUR 5,852 million, a decrease of 1.6% from the previous year. Negative foreign currency exchange effects were the primary factor in the segment’s decreased sales.

Restructuring

-The Company has said that its plant in Dundee, UK has faced serious difficulties in recent years due to a profound transformation of the car parc, resulting in a structural decline in the demand for premium tires 16-inches and smaller and an accelerated shift in entry-level, low-cost 16-inch and smaller tires from Asia. The transformation has made the plant unsuitable and financially unviable, even through a conversion. Against this backdrop, the Company announced its intention to close the Dundee factory by mid-2020. The priority now is to provide the 845 employees of the factory with the most effective support possible to enable them to face the consequences of this decision. The Company’s truck tire retreading business, sales and distribution of all its products and services in the UK will continue. (From a press release on November 5, 2018)

Joint Ventures

-Synthetic Rubber Indonesia (SRI), a joint venture between the Company and Chandra Asri Petrochemical, inaugurated the first synthetic rubber factory in Indonesia. The factory, located in Cilegon, Bantenis, produces polybutadiene rubber and solution-styrene butadiene rubber, mainly for export. The plant has a production capacity of up to 120 thousand tons per year. Chandra Petrochemical is supplying petrochemical raw materials for the new plant. SRI will export the synthetic rubber products mainly to Company factories in France, Germany, Spain and the U.S. The factory in Cilegon is recognized as the Company’s third synthetic rubber factory globally after its facilities in France and the U.S. (From an article of Republika on November 29, 2018)

-CFAO and the Company announced the closure of an agreement for the import and distribution of premium quality tires in Kenya and Uganda, in a joint venture owned 51% by CFAO and 49% by the Company. The governance is equally divided between CFAO and the Company. This new entity will provide the two countries with tires for cars, vans and light trucks, and will also import tires for heavy goods vehicles, two-wheelers, civil engineering and agricultural vehicles. The Company wants to accelerate the distribution of its high-end tires, with their proven longevity and durability, by seizing this growth opportunity in two regional African powerhouses. The joint venture will rely on the Company’s long-standing partners in Kenya and Uganda. (From a press release on March 21, 2018)

-The Company announced that it and Mobivia will combine their expertise in their respective historical markets in order to improve the customer experience and support the development of A.T.U. in Germany, Austria and Switzerland. Established in 1985, A.T.U has the largest network of auto centers in Germany. The brand operates 577 auto centers in Germany, 25 in Austria and 6 in Switzerland. A.T.U became part of the Mobivia group in December 2016, thereby enhancing Mobivia’s coverage as a European provider of multi-brand servicing through its historical brands Norauto, Midas and Carter-Cash. (From a press release on February 12, 2018)

Recent Developments

-The Company has begun producing Primacy 4 high performance tires at its factory in Itatiaia, Brazil. The new tire promises 30% greater durability and increased grip in wet weather and is available for 15- and 17-inch wheels. The Company developed a new tire pattern which allows 22% more space for water runoff. The Primacy 4 will first be offered in the aftermarket as the Company is negotiating with automakers to supply it as original equipment. (From multiple sources on October 11, 2018)

-The Company will invest USD 10 million to build a new corporate site in Queretaro, Mexico, according to Mike Boggs, CEO of the Company in Mexico. The project adds new capital investment beyond the USD 510 million plant the company is building in the neighboring state of Guanajuato, which will produce tires for high-performance cars and trucks. (From a Mexico-Now article on January 2, 2018)

Business Partnership

-Due to a newly signed exclusive agreement between the two companies, all 120 Company distributors in Argentina will also sell Fric-Rot and Monroe shock absorbers and suspension components beginning in May. Owned by Tenneco, Fric-Rot operates in Argentina under the brands Fric-Rot, Monroe shock absorbers and Walker exhaust systems. Its product lines include Fric-Rot and Monroe for light vehicles; Ranch, Adventure & Monroe Dakar for off road vehicles; Monroe Reflex and Ospectrum for high-end imported vehicles; and Monroe Magnum for heavy vehicles. Fric-Rot’s two plants in Argentina include a shock absorber production plant in Rosario, and an exhaust system production plant in San Martin. (From multiple sources on May 18, 2018)

Contracts

-The Company has six plants in Thailand, with production capacity distributed as follows: 45% for passenger cars and light trucks, 35% for trucks, 10% for aviation, and 10% for motorcycles. Each year the Company invests more than EUR 100 million in the region. The Company owns 30% of market share in Thailand and is targeting 20% market share in the ASEAN region within 5 years with 8% growth per year. The Company is preparing to manufacture tires for the new Toyota Altis and launching new products for the Toyota Camry, Honda Accord, BMW 3 Series and 5 Series, Mercedes-Benz E-Class and C-Class. (From an article of Thansettakij on August 16, 2018)

Outlook

-For the fiscal year ending December 31, 2019, the Company expects that its sales volumes will match the rate of growth of the markets that the individual segments are involved with. In addition, the Company expects that its operating income will match or exceed its operating income from the fiscal year ended December 31, 2018 at constant exchange rates and scope.

R&D Structure

-As of December 31, 2018, the Company has approximately 6,000 employees working in research and development.

-The Company's strategy for research and development is focused around three themes:

• The vehicle of the future, featuring concepts such as fuel-cell vehicles and autonomous vehicles.
• Mobility of the future, focusing on integrating tire solutions into intelligent transportation systems and trends such as ride- and car-sharing
• The reinvention of urban mobility.

R&D Facilities

• Research Center: Ladoux (France), Ota (Japan), Greenville (U.S.)
• Testing plant: Almeria (Spain)

Product Development

Michelin CrossClimate Agilis light truck tires
-In 2018, the Company launched the Michelin CrossClimate Agilis light truck tire. The CrossClimate Agilis features advanced technology across its entire design, including a new rubber compound, new tread pattern with enhanced grip across all road conditions, and EverGrip self-regenerating tread technology. With its performance, sales of CrossClimate Agilis tires were stronger than expected.

X Multi Energy truck tires
-The Company announced the launch of the X Multi Energy, a tire which along with X Multi, replaces the X Multiway 3D and offers a distinct product choice for regional haulage operators, prioritizing either fuel economy or longevity. This industry leading performance is the result of three innovative technologies in Infinicoil, Regenion and Powercoil, which feature in both the drive axle and all-round tire fitments. (From a press release on April 10, 2018)

Patents

-As of December 31, 2018, the Company has more than 2,000 active patents.

-During the fiscal year ended December 31, 2018, the Company completed or continued the following investment projects:

• Projects to increase capacity, improve productivity or refresh product lines for the Automotive tires operating segment in facilities located in Leon, Mexico; Shenyang, China; Pirot, Serbia; and Laem Chabang, Thailand.
• Projects to increase capacity, improve productivity or refresh product lines for the Road Transportation tires operating segment in facilities located in Romania, Thailand, Poland and India.

-The Company’s capital expenditure strategy, combined with its acquisition strategy, is designed to achieve the following objectives:

• Increase production capacity in fast growth markets, including premium passenger car and light truck tire segments in North America and Asia
• Align plants in mature markets to keep pace with product developments and improve competitiveness
• Optimize supply chain information systems and logistics hubs
• Develop digital services
• Expand distribution channels
• Pursue projects in raw materials and high-tech semi-finished products

-In 2018, three new high-capacity plants continued to ramp up tire production. The three listed plants are expected to produce a combined total of 400,000 tonnes of tires a year by 2020.

• Itatiaia in Brazil for passenger car and light truck tires
• Chennai in India for truck tires
• Shenyang 2 in China, which are designed to significantly increase passenger car and truck tire production capacity.

-The Company expects to increase the average production capacity of its leading tire facilities for passenger car, light truck and truck segments to 96,000 tonnes per year by 2020.

Investments outside France

<Mexico>
-In 2018, the Company began operations at a passenger vehicle and light truck tire plant in Leon, Mexico. The plant is designed to support a production capacity of five million tires per year, and is expected to reach full capacity by 2023.

<Thailand>
-Michelin Siam Group revealed that BFGoodrich is moving its production hub from the U.S. to the  Laem Chabang plant in Chonburi province, Thailand. Starting in January 2019, the Laem Chabang plant will play an important role in making BFGoodrich tires, specifically the popular BFGoodrich All-Terrain T/A KO2. Production will be utilized for both local sales, and exports to markets in Africa, Middle East, and Asia-Oceania. Tires from this plant will be delivered to customers including Ford, GM, Isuzu, Mazda, Toyota in Asia. (From an article of Thansettakij on December 26, 2018)