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Cost reduction programme is increased

  • 06 Jun 16

Management now expects being in a position to reduce annual costs by up to €1.2bn from 2017 to 2020. However, this number is not an annual cost saving number but an accumulated one, i.e. annual costs are believed to being reduced by another €300m or a good 1% of annual turnover. Management intends not to replace some of the retiring employees. In addition, lower inventories are believed to reduce costs by some €250m and lower other costs contribute another €200m. Finally, raw material costs are believed to fall by between €150m and €200m as a result of the ongoing optimisation process and the trend for lighter tyres. However, the latter will also reduce the ASP and, hence, revenue. The ongoing cost reduction programme concentrates on capacity expansion in Asia, North and South America. A growing proportion of production goes to plants that are already producing over 100,000 tyres a year. Finally, unit investment costs can be reduced by up to 30%, i.e. capex will fall in relative terms. As long as replacement tyre prices do not come under pressure, Michelin’s profit margin is expected to benefit from this. However, first indications from other market participants (i.e. Nokian Renkaat) suggest, that some price pressure has emerged during the course of 2015. For the time being, we do not see this trend intensifying as replacement tyre demand for both car and truck tyres is still good and growing. However, the situation is clearly different for truck tyres from the OEMs, except for Europe.