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Is Bridgestone Really On A Roll?

By betting a huge capacity on the relatively small market for passenger-car radials, the global tyre-maker runs the risk of spreading itself too flat.

By Ranju Sarkar

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When Shojiro Ishabishi started manufacturing tyres in 1931 at Kurume, a small city on the island of Kyushu in Japan, nobody asked him why he chose to dub his venture Bridgestone. After all, in English, Ishabishi translates into Stone Bridge. And almost 7 decades later, Bridgestone does not need to drop names: the company has become the world's largest tyre- and rubber goods-manufacturer with $18 billion of sales from 150 countries, and a 18.30 per cent share of the $60-billion global tyre market.

Size has never been a speed-breaker in Bridgestone's quest for new markets. Even as the other global giants, like the $13.32-billion Michelin and the $6.69-billion Continental, debate the desire to enter the Rs 8,100-crore Indian market, Bridgestone has taken the plunge. Although the demand for passenger car-radials stood at 11.46 lakh tyres in 1996-97, Bridgestone decided to set up a plant to make 20 lakh tyres a year. And, in November, 1997, the Japanese giant rolled out its first steel-belted radial from its Kheda (Indore) plant although the 66:24 joint venture with the Rs 2,484.70-crore ACC commenced commercial production only in March, 1998.

Kunio Sasamoto, CEO, BridgestoneNine months later, Bridgestone-ACC has quietly notched up a 15.58 per cent share of the car radials market--making it No. 4--by becoming an original equipment supplier to General Motors, Daewoo Motors, and Hyundai Motor, and making inroads into the replacement market in the cities. Armed with the latest radial technology, a huge plant, and global marketing practices, Bridgestone-ACC is trying to redefine the market. Still, the ride is unlikely to be smooth since its arch-rivals, like Michelin (global marketshare: 18.60 per cent), have decided to set up greenfield units, and local manufacturers, like MRF (marketshare: 21.82 per cent), J.K. Tyres (26.18 per cent), and Goodyear India (15.71 per cent), are gearing up to combat the new entrants.

One problem is that Bridgestone has set up a huge plant catering to a Rs 250-crore niche, which constitutes a mere 3.09 per cent of the market in value terms. Explains Kunio Sasamoto, 60, CEO, Bridgestone-ACC: "Since radialisation in the trucks and buses segment is poor, we thought it was better to start with cars. We are discussing our other options internally, but haven't decided yet." That's because radialisation in the car segment is 35 per cent--compared to near-zero for trucks and buses--and is expected to double in the next 5 years.

In fact, the demand for car radials is expected to go up by 58.15 per cent next year to 32.74 lakh units. These projections are partially based on the assumption that the Rs 8,473.73-crore Maruti Udyog will radialise all its models. In 1997-98, out of its output of 3.45 lakh cars, only 78,903 Zen and Esteem models were sold factory-fitted with radial tyres. Explains S.P. Singh, 50, Convenor, All-India Tyre Dealers Association: "Until now, there was no compulsion for Maruti to radialise. But now, it has become a competitive disadvantage for the company."

Since each car requires 5 tyres, Maruti Udyog's move to radialise will increase the annual demand for them by 12.04 lakh tyres in 1999-2000. But that will impact the demand for passenger-car radials in the replacement market--9.60 lakh tyres in 1997-98--since many owners replace their cross-ply tyres with radials. Moreover, by 2000, the capacity for car- radials is likely to go up to 40 lakh tyres--excluding Michelin's proposed unit.

Given the excess capacity and the recession in the auto industry--Maruti Udyog has cut production by 20 per cent--these projections are likely to go awry. In that case, Bridgestone-ACC's hopes ride in becoming an original equipment supplier to Maruti Udyog. If it does so for the Maruti 800, it may earn low margins, but will ensure capacity-utilisation, which is critical for the company. Says Sundeep Dhingra, 28, an analyst with Jardine Fleming: "Nobody makes money in the OE business since prices are 10 per cent lower than the replacement prices."

Indeed, according to Sasamoto, the Indian joint venture is likely to incur losses in the first 2 years. His reasons: high depreciation and interest costs, and the fact that Bridgestone-ACC will achieve 100 per cent capacity-utilisation only by end-2000. And 60 per cent of the company's current production is for the OE segment, which will only increase if Maruti becomes a customer. A global supplier to General Motors, Ford, and Suzuki, Bridgestone believes that success in the OE segment will, automatically, lead to higher sales in the replacement market as well. Explains S.K. Chatterji, 42, Senior Vice-President (Sales & Marketing), Bridgestone-ACC: "OE sales lead to a higher share in the replacement market. We believe that the customer replaces his original equipment fitment with the same brand."

Even then, if the demand projections for car radials are correct, the market-size will only be Rs 870 crore. Worse, since Bridgestone-ACC will not manufacture the cheaper cross-ply tyres--which constitute 95 per cent of the tyres sold in this country--it will never become a major player. In addition, Bridgestone has also decided to overlook the truck- and bus-tyres segment, which accounts for 70 per cent of the market. Says V.C. Viswanathan, 70, the Advisor (Marketing) to the Rs 1,242.80-crore J.K. Industries: "I see little rationale in that decision. It is primarily because Bridgestone, like other Japanese companies, is very cautious."

Realising its problems, Bridgestone is pursuing an aggressive marketing strategy to garner a higher share of the replacement segment. To woo its 550-odd retailers, Bridgestone-ACC offers commissions that are Rs 100-150 higher thanks to its premium pricing--prices are 10-12 per cent higher than the market--and lower trade- discounts. Explains Chatterji: "My product is better, which means extra costs. The higher price will more than even out in terms of product benefits."

In the long run. But, due to sluggish demand, huge trade-discounts are the norm. In fact, most dealers pass on their entire 10 per cent commission to the customer. And they only make money through the extra discounts they receive from the companies for cash-payments, or achieving fixed volume targets. Predicts Singh: "Bridgestone will have to reduce its prices soon if it wants to increase volumes."

However, Bridgestone feels it can woo customers through superior technology, better product features, and aggressive marketing. Like the other manufacturers, Bridgestone is setting up exclusive showrooms, christened Bridgestone Tyre Plazas. Two have already come up in Mumbai and Delhi. Globally, Bridgestone revolutionised the concept of tyre-retailing with its exclusive outlets, Kann and Cockpit. Explains Jagdeep Kapoor, 34, CEO, Samsika Marketing: "Tyres have changed from being a commodity to becoming labels. The transition from labels to brands will now happen with retailing, and merchandising." But are exclusive outlets viable? Points out S. Samuel, 63, Managing Director, Ceat: "Tyres are still a commodity. Even the exclusive outlets are franchisees; if it is not profitable enough, they will not continue with the business."

If so, Bridgestone will find it difficult to attain higher capacity-utilisation from the existing 50 per cent. Inevitably, lower volumes will lead to still-higher costs. Eventually, Bridgestone will have no option but to enter all the segments of the market. But one thing is clear: without a success in the car radials business, Bridgestone will not enter any segment that will involve additional investments. Agrees Sasamoto: "We are always guided by returns when we make investments."

Clearly, Bridgestone cannot afford to lose time. Despite the bad road-conditions, radialisation will happen in the truck-and-bus segment too. For instance, radial tyres account for 60 per cent of that market in Pakistan, which has similar road-conditions. And since Michelin has already test-marketed its truck radials, Bridgestone may have to service the market with imported products until the volumes justify the setting up of a greenfield plant. Eventually, however, Bridgestone will have no choice but to bridge this gap in its strategy.


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