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(Solved) COOPER TIRE & RUBBER CO. in 2014: Competition in a Highly Competitive Replacement Tire Market Javad Kargar, North Carolina Central University...


What 3–4 top priority issues do CEO Roy Armes and Cooper Tire management need to address?

COOPER TIRE & RUBBER CO. in 2014:
Competition in a Highly Competitive Replacement Tire Market
Javad Kargar, North Carolina Central University
Houtan Kargar, J.D. , North Carolina Central University
Robert Moffie, North Carolina Central University
In 2014, Cooper Tire was ranked as the eleventh largest tire producer worldwide and
was the North America’s fourth largest tire producer (Exhibit 1). Its capacity of 97,000
consumer tires a day was still 20% below what it had been four years earlier, before the
closing of its Albany, GA plant. With a mix equally divided between proprietary house
brand and private customers, Cooper marketed its tires in more than 100 countries around
the globe.
Cooper began its journey from obscurity to a tire industry nearly a century ago in
1914, when brothers-in-law John F. Schaefer and Claude E. Hart purchased M and M
Manufacturing Company in Akron, producing tire patches, tire cement and tire repair kits. A
year later, they purchased The Giant Tire & Rubber Company of Akron, a tire rebuilding
business, and two years later moved the business to Findlay, Ohio. By 1920, they had
broadened the scope of the firm, repositioning it as a tire manufacturer. At that time, the
firm had more than 130 domestic competitors, 40 in the state of Ohio alone. In 1930, the
company merged with the Falls Rubber Company to form the Master Tire & Rubber
Company. Within a year, the combined production of the three plants totaled 2,850 tires per
day.
The firm changed its name to Cooper Tire & Rubber Company in 1946, in
recognition of Ira J. Cooper’s contribution.1 In 1960, the company became a publicly held
corporation and was listed on the New York Stock Exchange, and its distribution of shares
facilitated another decade of growth. Throughout the next five decades, the company
expanded its products, manufacturing plants, distribution system and marketplace.
The 1980s were years of significant change for Cooper Tire and the tire industry
overall. Many American tire manufacturers scrambled to lower production capacity as the
domestic market became saturated. From 1979 to 1987, a total of 23 U.S. tire plants were
closed in the rush to downsize.2 Cooper executives calmly delineated strategies for
continued growth and even expansion of production. As its competitors deserted plants,
Cooper bought them and upgraded them. By overhauling older facilities, Cooper added
capacity for one-third the cost of building new ones. Research and development at Cooper
were also enhanced by several capital investments during the 1980s. Distribution was also
improved during the 1980s, with centers opening or expanding in Moraine, OH, Atlanta, GA
and Tacoma, WA. Cooper warehousing capacity totaled 3.2 million tires by 1985. By the
end of the 1980s, distribution centers at Findlay and Moraine were granted foreign trade
subzone status from the U.S. Department of Commerce. The designation diminished and
suspended Cooper's payment of duty on imported raw materials. Cooper joined the ranks of
Fortune 500 companies in 1983 as one of the largest industrial companies in the United
States.3 In the following year, its net sales exceeded $500 million, and its net income was
more than $24 million. In 1985, Cooper made its first foreign acquisition—a manufacturer
of inner tubes in Mexico. That same year, Cooper was named one of the 101Best
Performing Companies in America.4
Capital investments continued to grow in the 1990s: the company purchased a 1.8
million-square-foot tire manufacturing plant in Albany, Georgia, in 1990, and expanded its
1 Findlay and Bowling Green locations in 1993. Despite a lingering U.S. recession, Cooper's
net sales topped the $1 billion mark in 1991 and the company added almost a quarter of a
billion dollars more the following year. Construction of a new plant at Mt. Sterling,
Kentucky, got under way in 1995, and a $10.5 million upgrade of the Clarksdale, Mississippi
facility began in 1994. Cooper acquired British-based Avon Tyres in early 1997, which
manufactured products for the replacement tire industry in the United Kingdom and Western
Europe. The company also had a strategic alliance with Pirelli Tyres of Milan, Italy, which
involved contractual arrangements. This arrangement provided revenue to Cooper primarily
through commissions on sales of Pirelli tires by Cooper dealers. By 1999, Cooper had 50
manufacturing facilities in nine countries. Much of the company’s growth came through the
acquisition of The Standard Products Company (Standard), a move that added 10,000
employees to its payroll.
EXHIBIT 1 – North American Tire Plant Capacities
As of Jan. 1, 2014 (in thousands of units)
Passenger
Per day Light Truck
per day Truck
Per day Others
per day Total
per day 79.3 24.3 15.2 4.91 123.71 Carlisle Tire & Wheels Co.-USA
2
0.0
Continental Tire the Americas
2
31.9
Cooper Tire & Rubber Co.- USA
3
73.0
Goodyear Tire & Rubber Co.
8
131.0
GTY (General/Yokohama)- USA
1
0.0
Michelin North America Inc.
14
163.5
Mitas Tires North America Inc.
1
0.0
Pirelli Tire North America Inc.
2
4.0
Specialty Tires of America Inc.
2
0.0
Titan Tire Corp. – USA
3
0.0
Toyo Tire North America – USA
1
7.8
Yokohama Tire Corp. – USA
1
25.7
Grupo Carson/Euzkadi
1
15.0
(Continental AG) – Mexico
JK Tyre & Industries – Mexico
3
10.0
Corporacion de Occidente SA de
1
10.0
CV (Cooper Tire) – Mexico
U.S. Totals
40
442.1
Canadian Totals
6
46.3
Mexican Totals
9
62.8
TOTAL
55
551.2
2014 vs. 2013
+5
+0.4%
th
Source: Modern Tire Dealer, 48 Annual Facts Issue 0.0
3.6
24.0
26.0
0.0
33.0
0.0
1.7
0.4
0.0
7.8
1.1
5.0 0.0
6.0
0.0
18.8
3.9
7.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0 41.0
0.0
0.0
19.3
0.0
5.11
0.5
0.0
6.2
19.68
0.0
0.0
0.0 41.0
41.5
97.0
195.1
3.9
208.61
0.5
5.7
6.6
19.68
15.6
26.8
20.0 5.0
7.2 2.0
2.8 1.04
0.0 18.04
20.0 105.1
11.2
22.8
139.1
+0.9% 50.9
0.0
4.8
55.7
+1.1% 79.7
17.0
1.04
97.74
-0.1% 677.8
74.5
91.44
843.74
+0.5% Company/Plant Location
Bridgestone Americans Inc. # of
Plants 10 Cooper's capital investments, ongoing cost-cutting efforts and focus on the
replacement market almost doubled its operating margin from the late 1980s to the early
1990s. In fact, the company's efficient means of production propelled it to the highest gross
profit margins in the industry at 33 percent. When larger competitors turned to the
replacement market and tried to undercut Cooper's prices, those high margins gave the
company leeway to join in the price wars.
With the purchase of the highly regarded Avon Tyres in 1997, and the acquisition of
Mickey Thompson Performance Tires & Wheels in 2003, Cooper positioned itself as a
2 preeminent producer of high-performance and ultra-high performance tires. In 2003, Cooper
also entered a joint venture with Kenda Rubber Industrial Company Ltd. for construction of
a plant outside Shanghai, China, to produce radial passenger and light truck tires. Then, a
huge change for Cooper occurred in 2004 when the company sold its automotive business,
Cooper-Standard Automotive, for approximately $1.165 billion. The sale included the 47
manufacturing facilities and operations of Cooper-Standard Automotive, which was a global
manufacturer of fluid handling systems, body-sealing systems, and active and passive
vibration control systems, primarily for automotive original equipment manufacturers.
The sale of the automotive business in turn provided new opportunities for funding
growth in Cooper’s core tire business. In January 2005, Cooper announced an agreement to
buy 11% interest in Kumho Tire. That month, the company also announced it was forming a
new commercial division encompassing both Oliver Rubber Company and commercial tires.
In October 2005, the company announced an agreement to obtain 51% ownership in China’s
third largest tire manufacturer, Cooper Chengshan (Shandong) Passenger Tire Company Ltd.
and Cooper Chengshan (Shandong) Truck Tire Company Ltd. The company also liquidated
its 11% share in the Kumho Tire for $107 million, and it entered into a joint venture with
Resilient Technologies. In 2008, Cooper acquired approximately 38% ownership share of a
tire manufacturing plant in Mexico, which was the 2nd largest plant in Mexico, and the
company further invested in the plant in 2009 as well. In the third-quarter of 2009, Cooper
had closed its manufacturing plant in Albany, GA, and three distribution centers in North
America. The plant closure in Georgia resulted in workforce reduction of approximately
1,330 people, and 73 people for the distribution centers workforce. In 2011, Cooper
acquired an additional 21% ownership in its Mexican plant, leading to a 58% ownership. To
complement the company’s well-established European operations and product offerings, in
January 2012, Cooper acquired the assets of an existing tire plant in Krusevac, Serbia,
providing an excellent location to supply tires to the European and Russian markets. By the
end of 2013, Cooper had over 65 facilities, which were located within 11 countries. These
facilities included manufacturing, sales, distribution, technical and design.
With the exception of 2005, 2006 and 2008, Cooper had earned a profit in every year
since its inception—a truly remarkable accomplishments in a mature business where it was
common for industry members to post losses when demand for tire sagged. Cooper had paid
dividends every year and had raised the base dividend it paid to stockholders every year
since 1980 when the company first began paying cash dividends. Exhibit 2 provides
highlights of Cooper’s growth since 1983. COOPER TIRE IN 2014
Ivan Gorr, the architect of Cooper’s value strategy in the tire industry, was regarded
often as a “model company president.” Gorr was elected executive vice president in 1977
and president in 1982. He was appointed CEO and chairman in 1989. Under Gorr, who
served as Cooper’s CEO until October 1994, Cooper was known for its aggressive pursuit of
technical challenges, rigorous quality systems, strong emphasis on employee relations and
workforce productivity, cost conscious corporate culture, and its ability to achieve low costs
per tire produced. The company had a very streamlined organizational structure, incentive
based compensation systems, and tire plants that were among the most efficient producer in
the tire industry in the United States. Gorr proved himself as a master in crafting and
executing a low-cost leadership strategy. Cooper's annual revenues increased from $1.2
billion in 1992 to $1.4 billion in 1994, while net income climbed to $128.5 million. Gorr
retired that year, at age 65, in accordance with company policy, leaving behind a sterling
record: sales had increased threefold and profits almost sextupled during his last decade at
the helm.
3 EXHIBIT 2 Cooper’s Growing Presence in the Market for Tire, 1983 – 2013
(in thousands, except per share and dividend data)
Year Net Sales Operating
Profit Before
Taxes Net Income Net Income
Per Share 1983 457,780 39,796 21,406 0.27 0.04 1984 555,388 41,978 23,578 0.31 0.05 1985 522,639 31,157 18,471 0.23 0.05 1990 859,896 104,874 66,464 0.81 0.11 1991 1,100,071 124,465 79,435 0.96 0.13 1995 1,493,622 180,070 71,250 1.35 0.27 1999 2,196,343 215,497 79,600 1.79 0.42 2002 1,742,218 113,716 55,032 0.74 0.42 2003 1,850,853 65,019 27,344 0.37 0.42 2004 2,081,609 63,224 27,446 0.37 0.42 2005 2,155,185 26,435 (15,033) (0.24) 0.42 2006 2,676,242 (9,749) (85,890) (1.40) 0.42 2007 2,932,515 134,392 91,435 1.46 0.42 2008 2,881,811 (216,633) (219,383) (3.88) 0.43 2009 2,778,990 156,269 83,359 1.54 0.42 2010 3,342,784 188,374 116,331 1.86 0.42 2011 3,907,838 163,301 253,503 4.02 0.42 2012 4,200,836 396,962 220,371 3.49 0.42 2013 3,439,233 240,714 111,013 Cooper Tire’s Home Page
http://coopertire.com/Investors/SEC-Filings.aspx
4 1.73 Dividend per
Share 0.42 Gorr was succeeded as chairman and CEO by Pat Rooney, who had joined the
company right out of college in 1956, and had worked in various roles under Gorr. In 1985,
Rooney was given responsibility for all tire sales and was appointed vice president of
marketing for Cooper’s operations in 1987. Rooney was elected president of tire operations
and a director of the company in 1990. Sales continued to grow under Rooney’s leadership,
totaling $1.6 billion by 1996. But high raw material costs that, because of competitive
pressures, could not be passed on to customers in the form of price increases, cut into
Cooper's net profit in the intervening years. Profits declined to $112.8 million in 1995 and
slid to 107.9 million in 1996. Cooper's usually high-flying stock suffered as well, dropping
from a high of more than $39.50 per share in 1993 to less than $18 in 1996. Rooney retired
in June 2000, when he became 65 years old. The firm’s net sales in 1956, when Rooney
joined Cooper were $23.4 million. Net sales for 1999, his last year at the helm, reached $2.2
billion.
In 1999, Rooney transferred his duties as Cooper president to Tom Dattilo, who
succeeded him as chairman and CEO. Dattilo joined Cooper in January 1999 as chief
operating officer. Prior to joining Cooper, Dattilo spent more than 21 years in the
automotive parts business with his latest position being president of Dana’s sealing products
group, one of the world’s largest manufacturers of vehicular and engine components.
Dattilo resigned unexpectedly on August 3, 2006, the same day as the second-quarter
results were announced. Cooper Tire has been struggling for the past two years. Though it
posted net sales of $625 million for the second quarter, up 22% versus the same period in
2005, it posted deeper losses for the second quarter. Cooper’s loss fell to $21 million from a
loss of $7 million in the same period of the previous year. It was the firm’s sixth consecutive
quarterly loss. Besides the earnings shortfall, Cooper had been removed from the S&P 500
index and its credit ratings was downgraded into “junk” territory. The stock fell from the
August 2 close of $10 to $8.23 on August 9. The 52-week high was $17.56. Raw material
prices continued to get higher while industry demand remained weak in North America and
Europe. At that time, Byron Pond, a member of Cooper’s board of directors stepped in to
serve as interim CEO during a search for permanent replacement. Pond also joined two
other directors to form an “office of the chairman” to oversee governance of the company
during the search process. He took a very proactive role in running the company.
As Jonathan Steinmetz, Morgan Stanley analyst stated, “The departure of the
company's CEO may lead to a positive management change, but the problems here run
deeper than just management, and it may not be easy to attract star talent to a $564 million
market-cap tire company based in Findlay, Ohio. The company's problems include high cost
structure, low brand value, rising raw material costs, weak end markets, production
problems, lack of captive distribution, increasing production complexity and personnel
turnover. The company still does not appear to have a fully developed plan to offset these
challenges.”5
Some tire dealers believed that a main problem was that the company had built its
business as a value-tire producer and at the time it was harder to produce tires in that
segment profitably in North America. According to Mr. Lesieur, a dealer, “I don’t know
how the company sticks to what it knows best but still makes money.” He continued by
saying, “I’m unsure what the company’s vision is for the next five to 10 years.”6
Roy Armes joined the company in December 2006 as its CEO and President. A year
later, he was also appointed Chairman. When Armes was hired, some analysts thought it
was a sign that Pond was preparing Cooper Tire for sale.7 Armes came to Cooper following
a 31-year career at Whirlpool Corporation, where he rose to senior vice president of the
Project Management Office. He also brought with him experience in Mexico and China.
Throughout his tenure at Cooper, Armes has spearheaded the positive transformation
5 of the company’s business model, creating a stronger, more resilient and more sustainable
Cooper which was better positioned to drive long-term value. Like his predecessors, Armes
continued to pursue a rapid growth strategy, expanding the company production capabilities
via both acquisition and plant improvements. The company has performed well under his
direction. In 2008, the company unveiled an ambitious five-year strategic plan, and by the
close of 2012, nearly all of the financial and performance goals set within the plan were
achieved. In fact, 2012 was a record-setting year for the company as Cooper generated
record full-year net sales of $4.2 billion and record operating profit of $379 million.
Cooper’s business was still in the recovery stages in 2011-2012 (see Exhibit 3). Cooper’s Product Line, 1920 - 2014
Originally, Cooper organized its operations into two business divisions: Automotive
products, and Tire products. After the sale of its automotive business in late 2004, Cooper
only operated in the Tire business. Automotive Products With more than 1,800 specific parts, Cooper’s automotive
business produced primary product categories including body sealing systems, hose and
hose assemblies, active and passive vibration control systems, and fluid handling systems.
The division served primarily the global automotive manufacturers for installation on new
vehicles. The division maintained sales offices in strategic locations to provide support and
service to its customers.
A significant element of the division’s global strategy was to increase its level of
sales to automotive manufacturers based outside of the United States. Through its joint
venture with Nishikawa Rubber Company of Japan, the company had business with major
Japanese automobile producers. In 1999, Cooper acquired Standard for approximately $864
million. Standard produced vibration control components at a facility in Michell, Canada,
and had body sealing plants in Canada, Mexico, Brazil, the United Kingdom, France and
Poland. In the year 2000, the company also acquired Siebe Automotive. Siebe
manufactured automotive fluid handling systems, and components for sale to the world’s
automotive original equipment manufacturers and large Tier 1 automotive suppliers. The
acquisitions made by the company strengthened the division’s ability to compete in a highly
competitive environment. Reflecting the commitment to world-class manufacturing,
Cooper’s plants had received numerous quality awards including the Gold Pentastar from
Chrysler, the Certified Supplier Award from Eaton Yale Suspension Division, and the Q1
award from Ford Motor Company. The Company also received the Source Award as the top
supplier in the automotive division.
Each product line in Cooper’s automotive division operated in a highly competitive
environment. The product lines competed with numerous major competitors in North
America, Europe and South America. There were at least three major and several lesser
competitors in each of the product lines and markets served by the division. Some of these
competitors competed in only one product line or in one geographic region while others
competed in more than one product line or geographic region. The global consolidation that
had been taking place in the automotive supply industry had created larger and stronger
competitors than previously existed. Maintaining a strong competitive position was critical
when the automotive companies were reducing their supply bases to exclude suppliers who
could not meet their increasingly rigorous requirements. Since improving profitability in the
tire industry was becoming increasingly difficult, many tire companies were turning to
engineered products. Auto makers, in their own efforts to reduce costs, had been pushing
suppliers to lower prices. This was creating opportunities for those companies that had the
economies of scale needed to manufacture products cheaply and still remain profitable.
6 On December 23, 2004, Cooper sold its automotive division to Cypress Group and
Goldman Sachs Capital Partners. With the sale of the division, the company wanted to focus
more on the replacement tires segment. Tire Products In 2014, Cooper with its subsidiaries was the fourth largest tire
manufacturer in North America and, the eleventh largest tire company in the world based on
sales.8 Cooper focused on the manufacture and sale of passenger and light and medium
truck replacement tires. As of December 2013, Cooper operated 9 manufacturing facilities
and 38 distribution centers in 11 countries and employed 13,280 persons worldwide.9
The company was organized into two separate business segments: North American
Tire Operations and International Tire Operations. Each segment was managed separately.
North American Tire Operations Segment The North American Tire Operations segment
manufactured and marketed passenger car and light truck tire, primarily for sale in the
United States replacement tire market. As of December 2013, Cooper operated three
manufacturing facilities in the United States and one in Mexico. In this segment, Cooper
operated in a highly competitive market, which included Bridgestone, Goodyear and
Michelin. These competitors were substantially larger than Cooper and served Original
Equipment Manufacturing (OEM) as well as the replacement tire market. In this segment,
Cooper also faced competition from low-cost producers in Asia, Mexico, South America and
Central Europe. Some of these producers were foreign affiliates of the segment’s
competitors in North America. In 2013, the segment had a market share of about 12 percent
of all passenger and light vehicle replacement tire sales in the U.S. (Exhibit 4). The segment
also participated in the U.S. medium truck replacement market. In addition to
manufacturing tires in the U.S., the segment had a joint venture manufacturing operation in
Mexico. Only a small portion of the products manufactured by the segment were exported
throughout the world.
Success in competing for the sale of replacement tires was dependent upon many
factors, the most important of which were price, quality, performance, line coverage,
availability through appropriate distribution channels and relationship with dealers. Other
factors included warranty, credit terms and other value-added programs. The segment has
built close working relationships through the year with independent dealers. Cooper
management believed those relationships have enabled the company to obtain a competitive
advantage in that channel of market. As a steadily increasing percentage of replacement
tires were sold by large regional and national tire retailers, the segment has increased its
penetration of those distribution channels, while maintaining a focus on its traditionally
strong network of independent dealers.
International Tire Operations Segment The international Tire Operations segment had
two manufacturing operations in the United Kingdom, one in the Republic of Serbia and two
in China. The United Kingdom entity manufactured and marketed passenger car, light truck,
motorcycle and racing tires and tire retread material for the global market. The Republic of
Serbia entity manufactured light vehicle tires for the European markets. The Segment’s
entity in China manufactured only light vehicle tires. Under an agreement with the
government of China, all of the tires produced at the facility have been exported. The
segment also had a joint venture in China, Cooper Chengshan Tire, which manufactured and
marketed radial bias medium truck tires as well as passenger and light truck tires for the
global market.
EXHIBIT 3 – Five-Year Financial and Operating Summary, 2009-2013
(in millions, except per share data)
7 FOR THE YEAR
Net Sales
Cost of products sold
Gross profit
Selling, General &Administrative
Impairment of Good will
Restructuring
Operating profit before taxes
Interest expense
Interest income
Other income – Expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Income (loss)- from continued operations
Noncontrolling shareholders’ interests
Income (loss) from operations attributable
to Cooper stockholders
Net earnings (loss) per share:
Basic
Diluted
Dividends declared per share
Percentage of net earnings to net sales
Return on average stockholders’ equity
Capital expenditures
Depreciation & Amortization
AT THE END
Cash, cash equivalents
Current assets
Current liabilities
Working capital
Current ratio
Net property, plant, and equipment
Total assets
Long-term liabilities
Total liabilities
Stockholders’ equity
Average Common Shares (000s)
Employees 2013
3,439.2
2,923.0
_______
516.2 2012
2011
4,200.8 3,907.8
3,546.6 3,562.8
_______ _______
654.2
345.0 2010
3,342.7
2,940.3
_______
402.4 2009
2,778.9
2,359.9
______
419.0 275.5
----_______
240.7
(27.9)
0.8
(0.6)
_______
213.0
79.4
_______
133.6
(22.6)
_______
111.0
====== 257.3
----_______
396.9
(29.5)
2.6
(1.5)
_______
368.4...

 


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