Structure Of The Global Tire Industry Marketing Essay

In 1998, the Michelin Group which developed the radial tire came out with a new concept of PAX system [1] . Then in 2003, the group was the number one original equipment tire manufacturer (OEM) in the world with a market share of 19.2%. The group also operated in all tire segments which included car and truck, motorcycles, earthmovers, bus, subway train and aircraft. Then the tires were build more than 830,000 tires a day. PAX was built base on the run-flat technology (the vehicle could move smoothly even if the tire was flat (punctures)). It could run up to 125 miles at a constant speed of 50mph. In addition, PAX system was more compatible with the heavy vehicles such as Sport Utility Vehicles (SUVs) and pickup trucks. The system required specially designed chassis and wheels.

The PAX system was first launched in European market in 2002, however it was not success. Having failed in the European market, the group tried to extend its innovation in the US market. The first initiative was taken by Honda Motor Company by adopting the PAX system on its Odyssey model.

Structure of the Global Tire Industry

The history of the tire industry could be traced back to the manufacturing of bicycle tires in the 1846, which used solid rubber tires till the invention of the pneumatic tire [2] by John Dunlop in 1888. The tire industry was formed in the 19th century when several firms started manufacturing bicycle tires in Europe and the US.

Goodrich patented the first tubeless pneumatic tire in 1903 with France’s Michelin of the removable tires and Germany’s Continental fist tread pattern tires in 1904. During the 1930s and 1940s, the consumer’s preference gradually shifted from bicycles to automobiles. Tires progressed from its basic form in 1910 to the introduction of cross-ply [3] tires in the 1920s. Into the 1930s and the 1940s synthetic rubber improved the quality of raw materials and helped in reducing the cost. Tires life expectancy increased from 9 months to 3 years. Radial tires in the European market saw an increase focus in key areas such as grip, safety, durability, comfort, and fuel consumption.

The tire industry was heavily concentrated the US market in 1958, with four of the largest producers (Good Year, Firestone, US Rubber, and Goodrich) accounting for 74% that year and 72% at the end of 1960. Michelin was the only non-US manufacturer in the top 5 in 1970. As radial technology gained acceptance Worldwide, the US’s production of the bias-ply tires, was reluctant to adopt the new technology knowing that huge sums of money was going to be used in order to upgrade their tire production. Eventually, they were forced to develop the radial technology which led to the major acquisition in the tire industry.

Within the 1980s, the tire industry was characterized by significant mergers and acquisitions. Many US tire firms were sold to European and Japanese buyers. In 2003, the three largest manufactures together contributed around 56% of the World tire market of which Michelin share was 19.2% followed by Bridgestone and Goodyear with a share of 19.1% and 17.4% respectively.

Market Segments and Regional Differences

Six categories were consisted in the tire market. In 2003, the passenger car/light truck segmenting the largest portion, at 51% of the market. Truck tires stood at 32.4% and motorbike tires at 6.7%. The aircraft category was the smallest share of the market, 0.6%, with the three smallest categories accounting for less than 10% of the market value.

North America, Western Europe and Japan accounted for over 80% of the tire sales in 2003. In volume terms, Asia Oceanic region accounted for 30% of the market compared to North America which accounted for 29% and Europe 28% respectively.

Channels of Distribution

The tire industry served two markets; the Original Equipment Market (OE) and the Replacement Market (RT). The OEM market was characterized by low profitability and the market had played an important role because it provided large orders for the supply of new vehicles as well as the prospects of the future replacement sales, making it a priority to be the primary innovator and deliverer of products at the right place and time.

The Replacement Market consisted of large volume costumers (major tire distributors) and smaller tire outlets. Replacement tires were sold to the vehicle owners through tire dealers, chain stores, service station, department stores, warehouse clubs and discount clubs. A study conducted by Goodyear in 2001, positioned the RT into four market segments of Priced-constrained buyers, Value-oriented buyers, quality buyers, and commodity buyers.

In 2003, the OE was mainly driven by the Asian market and the RT by the North America. Michelins share of 28% followed by Pirelli who contributed 27% in the European OE market, while Michelins share of 23% compared to Goodyear and Bridgestone who had a share of 32% and 27% respectively in the North American OE market.

Research and Development

Research and Development was an important role in the demands of OE manufacturers. Tires underwent both subjective and objective tests before they were commercially launched. The test evaluated the strengths and weakness associated with the tires. Performance, grip, noise level and comfort were the different areas that were evaluated. Joint testing (between the tire manufactures and the vehicle manufactures) would be conducted before it gets acceptance from the vehicle manufacturer.

The success of the tire manufacturers in the OE market was dependent on the toughness of the R&D and manufacturing process due to higher frequency of product cycles for OE tires [4] . New development of tires also required additional acceptance from car manufactures as modifications in the design of cars were necessary. Consideration by the OEM’s was needed also in the replacement sales because consumers tended to buy the same type of tires. The R&D expenditure of the top three companies in 2002 was around 10%.

The Michelin Group

The Michelin group was established in 1889 by two French brothers, Andre and Edouard Michelin. Michelin group was running its business in tire manufacture, produced tire for all kind of vehicles; bicycles, motorcycles, cars and trucks, subway trains, airplane, and space shuttle. Moreover, it also published maps and tourist guides and provided online support services.

Michelin group was ranked number one in tire manufacturer for many years. In 2008, Michelin still in the first rank, with 17.1%share in the market. The group had a sale network covering 170 countries over the world under using multi-brand; Michelin and BF Goodrich as its world-wide brands, Kleber in Europe, Uniroyal in North America and Warrior in China as its strong regional brands and also other brands such as Riken, Taurus, Kormoran, Reamic, Michelin Remix, Pneu Luarent, Encore, Euromaster, Tire Centers, and Tyreplus.

Innovations at Michelin

Since Michelin was founded, it is always looking for new technologies and new innovation. It established 4 technology centers which located in its main market areas; Ladoux in France, Almeria in Spain, Laurens in United State, and Jari in Japan. Michelin budgets for doing research about 4% of its total profit and hires more than 4,000 engineers and technicians to work in the technology centers. The researchers come from many fields of study such as automotive engineering, chemical engineering, mechanical engineering, electrical engineering, physics, mathematics, and software development that 5% of them graduated in doctorate, 15% in master, and 40% in bachelor.

Michelin’s innovation comes up by following its design process.

First, in fundamental research step, it much concerns the tire itself. Using fundamental knowledge improves and breaks up the limit of the last innovation. Therefore the prototype tires which are designed at the end of this step are very different from the current products. Second, in product design step, researchers have to adapt the first prototype tires to match the customer’s requirement and be possible to produce in the industrial process. Finally, in industrialization step, the prototype tires are sent to the manufacturer for pre-production the new tires. After modify the new tires or the production lines to be suitable for each other, this new innovation will be launched into the market.

During development the tire, Michelin always involve in standards and regulations, and tests and measurements process. For selling the new tire, Michelin has to test to ensure its new tire is pass the governing standard which currently cover endurance performance (robustness, shock resistance, etc.) and noise. Moreover Michelin also compare its new tire with other tire in the market to update the professional standard in the market and keep itself in a competitive position.

The Radial Technology and its delayed entry in the US market

The first radial tire was invented in 1913 by the British company, Palmer Tyre Company. Michelin first launched the radial tire in 1948 and licensed this technology like other European companies such as Pirelli and Dunlop did. Therefore in 1970, most tires that produced in Europe were radial, while most tires that produced in US were bias ply.

Radial tire was not successful when Goodyear introduced it in US in 1965. The main reason was the switching cost was quite high. The raw material and the labor cost for producing the radial tire cost more than the bias ply for 20-35%. Furthermore the radial tire required some change in the car to fit it with the existed car. Without co-ordination between tire manufacturers and car manufacturers, manufacturers were not willing to invest in the radial technology without assured returns.

In the mid 1970s, Michelin opened up plants for producing radial tire, one in Canada and two in US. At the same time, Michelin made a contract with Ford and General Motors to use its radial tire. The first Ford car that used radial tire was Ford Continental. The radial tire had good feedbacks from the customers because it had longer work life than the old one. The growing acceptance forced the manufacturers to change into the radial technology. The market share of radial tire in US was increase from 32% in 1975 to 95% in 1991.

The Run-flat Technology and The Pax System

In 1991, Goodyear Tire and Rubber company introduced run-flat technology which enabled the flat tire to run up to 50 miles at zero pressure at 55 mph. There were two types of run flat technologies; Self Supporting Tires (SST) and Auxiliary Supported Run-Flat system. In 2003, SSTs dominated about 90% of the 3 million run- flat tire sold annually. SSTs had become standard equipment on BMW’s 6 Series and a popular option in BMW’s mini Cooper. In 1997, Michelin was launch PAX system that derived the ideas from SSTs technology. However , compared to SSTs, the cost of ownership of PAX system was more economical and the raw materials was also less than SSTs. Michelin aimed at improving its performance including road holding ability, the fuel efficiency, the weight and the comfort. From the market research, it identified that 60% of customers preferred run-flat tires because of its time safety and performance considerations. As the result, the initial outlook of PAX system focused on the benefits of the continued mobility using the PAX system. The tire, the wheel, the support and the pressure detector are four main components of PAX system. When a tire had suffered a complete loss of pressure, it still enabled the driver to ride up to 200 kilometers at a speed of 80 km/h with continue provided a high level of residue comfort. Due to its unique asymmetric wheel design, it required a special tooling for removing and re-mounting the tire. In other words, a flat tire customer had to find authorized PAX outlet to repair or replace the tire.

Launch of the PAX system

In 2001 and 2003, the Renault Scenic (mini-van segment) and Audi A8 (performance car) were incorporated with the PAX system respectively. These PAX modified vehicle could not use with either traditional tires or the SSTs. Not only developing network in Europe, Michelin ensured the customer with its services by providing repair centers that located within the range of 200 km as the same potential distant of its flat tire feature. Since August 2002, over 400 outlets including 24×7 emergency services that had equipment, skills and parts were available. The after sales support of the PAX system included “hatbox” which contained a set of ready-to-use PAX system assembly. In addition, special road service and emergency service are provided when the customers were unable to reach the authorized Michelin dealer.

PAX and Partnership

In order to gain the share from every sale, Michelin licensed the design and signed agreements with Goodyear, Pirelli, Sumitomo and Toyo Tire & Rubber as technology partners to further develop the design. The agreement also included the joint development of an infrastructure to provide the after-sales services for PAX system users. In 1988, Pirelli, the Italian manufacturer was the first to sign joint technology development agreement with Michelin. Both these manufacturer cooperated to create an extranet site in both of public and private section to offer the details of PAX system. After signing a licensing agreement in 2000, Goodyear Tire & Rubber company and Michelin agreed to co-operate in inventing new solution to run-flat technology. As a result, Goodyear granted Michelin a patent operating license for its EMT (Extended Mobility Technology) self-supporting run flat technology and pressure monitoring systems. In return, Michelin granted Goodyear a PAX license. As a result, concept of run-flat technology could gain wider acceptance because of pooling parts of their run-flat research and development research. In 2001, Sumitomo Rubber Industries (SRI) signed a licensing agreement to adopt PAX system in order to expand PAX to Japan market and then to other Asia market where SRI had its operation. In 2004, Michelin and Toyo Tire signed a licensing that would grant Toyo an opportunity to manufacture, sell and service the PAX system. As a result, Toyo would automatically contribute to the adoption of the new standard in Japanese car market.

Future Scenery

PAX system will continue focus on to create all the four original equipment tire segment such as the luxury, SUVs, Mass-market vehicles/ non-luxury, and pickup/ full size van segment. Moreover according to the report Michelin was ranked as the highest in three out of four OE tire segment, in the other hand Goodyear was ranked highest in the four segments. Furthermore, Michelin create its image to lead the market recognize the PAX system as the standard of the future. Moreover the reason why Michelin is going to go faster than the radial because it was pressured stronger, so there is an acceleration of market acceptance for innovation, and we hope it’s the case with the PAX.